[Senate Hearing 114-193]
[From the U.S. Government Publishing Office]


                                                      S. Hrg. 114-193

    REVIEW OF THE AFFORDABLE CARE ACT HEALTH INSURANCE CO-OP PROGRAM

=======================================================================
 
                                 HEARING

                               BEFORE THE

                PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

                                 OF THE

                              COMMITTEE ON
               HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED FOURTEENTH CONGRESS


                             SECOND SESSION

                               __________

                             MARCH 10, 2016

                               __________

         Available via the World Wide Web: http://www.fdsys.gov

                       Printed for the use of the
        Committee on Homeland Security and Governmental Affairs
        
        
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        COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

                    RON JOHNSON, Wisconsin, Chairman
JOHN McCAIN, Arizona                 THOMAS R. CARPER, Delaware
ROB PORTMAN, Ohio                    CLAIRE McCASKILL, Missouri
RAND PAUL, Kentucky                  JON TESTER, Montana
JAMES LANKFORD, Oklahoma             TAMMY BALDWIN, Wisconsin
MICHAEL B. ENZI, Wyoming             HEIDI HEITKAMP, North Dakota
KELLY AYOTTE, New Hampshire          CORY A. BOOKER, New Jersey
JONI ERNST, Iowa                     GARY C. PETERS, Michigan
BEN SASSE, Nebraska

                  Christopher R. Hixon, Staff Director
              Gabrielle A. Batkin, Minority Staff Director
           John P. Kilvington, Minority Deputy Staff Director
                     Laura W. Kilbride, Chief Clerk
                   Benjamin C. Grazda, Hearing Clerk


                PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

                       ROB PORTMAN, Ohio Chairman
JOHN McCAIN, Arizona                 CLAIRE McCASKILL, Missouri
RAND PAUL, Kentucky                  JON TESTER, Montana
JAMES LANKFORD, Oklahoma             TAMMY BALDWIN, Wisconsin
KELLY AYOTTE, New Hampshire          HEIDI HEITKAMP, North Dakota
BEN SASSE, Nebraska

                     Brian Callanan, Staff Director
        Margaret Daum, Minority Staff Director and Chief Counsel
                       Kelsey Stroud, Chief Clerk
                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Portman..............................................     1
    Senator Sasse................................................     5
Prepared statements:
    Senator Portman..............................................    43
    Senator Sasse................................................    48

                               WITNESSES
                        Thursday, March 10, 2016

Andy Slavitt, Acting Administrator, Centers for Medicare and 
  Medicaid Services..............................................     7
Kevin Counihan, Marketplace Chief Executive Officer and Deputy 
  Administrator, Centers for Medicare and Medicaid Services......     9
Scott E. Harrington, Ph.D., Alan B. Miller Professor, and Chair, 
  Health Care Management Department, The Wharton School, 
  University of Pennsylvania.....................................    31

                     Alphabetical List of Witnesses

Counihan, Kevin:
    Testimony....................................................     9
    Prepared statement...........................................    50
Harrington, Scott E., Ph.D.:
    Testimony....................................................    31
    Prepared statement...........................................    60
Slavitt, Andy:
    Testimony....................................................     7
    Prepared statement...........................................    50

                                APPENDIX

Majority Staff Report............................................    77
Hearing Exhibits.................................................   140
Responses to post-hearing questions for the Record
    Mr. Slavitt and Mr. Counihan.................................   227
    Mr. Harrington...............................................   230

 
    REVIEW OF THE AFFORDABLE CARE ACT HEALTH INSURANCE CO-OP PROGRAM

                              ----------                              


                        THURSDAY, MARCH 10, 2016

                                   U.S. Senate,    
              Permanent Subcommittee on Investigations,    
                    of the Committee on Homeland Security  
                                  and Governmental Affairs,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 9:34 a.m., in 
room SD-342, Dirksen Senate Office Building, Hon. Rob Portman, 
Chairman of the Subcommittee, presiding.
    Present: Senators Portman, Johnson, Lankford, Ayotte, and 
Sasse.
    Staff present: Mel Beras, Chris Barkley, Bryan Berky, 
Samantha Brennan, David Brewer, Kyle Brosnan, Brian Callanan, 
Will Council, Margaret Daum, John Kashuba, Andrew Polesovsky, 
Matt Owen, Aylene Senger, Kelsey Stroud, and Satya Thallam.

              OPENING STATEMENT OF SENATOR PORTMAN

    Senator Portman. Let us go ahead and get started. There is 
a vote at 11:30, and this may make it difficult for us to get 
through all the questions unless we get started now. I want to 
thank Senator Sasse for being here. I think at least four of 
our colleagues have indicated they are going to join us today, 
so we will be seeing Senators coming in and out during a busy 
day. But let us bring the hearing to order.
    I want to begin by noting that Senator McCaskill will not 
be with us today. As some of you know, she is home in Missouri 
attending to some very important health issues. We wish her 
well. We know she will be back with us soon, I hope as soon as 
next week. And I will say I suggested to her that we postpone 
this hearing until she got back, and her answer was, no, that 
there is lots of work for our Subcommittee to do and we should 
allow the Senate's business to go on, which is the way she is. 
I appreciate her attitude. She will be submitting questions for 
the record, and I want to on behalf of the Subcommittee thank 
Senator McCaskill's staff for their hard work in preparing for 
this hearing.
    We are here today to discuss the Administration's 
unfortunate adventure in the health care startup business. That 
is kind of how I look at this. The Affordable Care Act (ACA) 
created something called the Consumer Operated and Oriented 
Plan (CO-OP) Program. It was really a gesture to those who 
favored a public option and were not successful in advocating 
for that. Under the 
CO-OP Program, the Department of Health and Human Services 
(HHS) awarded $2.4 billion of taxpayer money to 23 nonprofit 
health insurance CO-OPs. As of today, of those 23, 12 have 
failed. These 12 collectively received about $1.2 billion in 
taxpayer money that is almost certainly lost, and we can talk 
about that later in the Q&A. Their collapse, by the way, also 
caused 740,000 people in 14 States to lose their health 
insurance provider and have to scramble to find new coverage, 
most with little or no time.
    Over the last 9 months, our Subcommittee has carefully 
investigated these failures. We wanted to know whether HHS, 
when it played the role of investor, made good or bad decisions 
with taxpayer money.
    Unfortunately, what we found out is that a lot of bad 
decisions were made. In a Majority Staff Report released 
today\1\, we detail those findings. This report is here, and 
you all should have it. We detail findings that HHS was aware 
of serious problems concerning the failed CO-OPs' enrollment 
strategies, pricing, financial forecasts, and management before 
the Department ever approved the initial loans. Once the CO-OPs 
got going in 2014, things went south in a hurry--both in terms 
of financial losses and enrollment figures that wildly deviated 
from the CO-OPs' own projections. The failed CO-OPs ultimately 
racked up $376 million in losses in 2014 and more than $1 
billion in losses in 2015. But despite getting regular reports 
that the CO-OPs were hemorrhaging cash, HHS took essentially no 
corrective action for over a year.
---------------------------------------------------------------------------
    \1\ The Majority Staff report appears in the Appendix on page 77.
---------------------------------------------------------------------------
    Worse, the Department approved additional loan awards to 
three of the now failed CO-OPs. This happened in 2014. This was 
despite clear warnings that these CO-OPs did not have reliable 
plans for turning things around.
    The Majority Staff Report explains these findings in great 
detail, and without objection, that report and its appendix are 
ordered to be made part of the record.
    Senator Portman. Let me give you a few highlights.
    When HHS approved startup loans for the failed CO-OPs in 
2012, it asked a reputable firm, Deloitte Consulting, to 
evaluate the CO-OPs' proposed loan applications and business 
plans. We have reviewed Deloitte's analysis as part of our 
investigation. Here is what we found.
    You will probably hear from our witnesses that Deloitte 
gave the CO-OPs a ``passing'' score, but it was based on a 
grading scale set by HHS, and Deloitte warned HHS of very 
specific concerns with the failed CO-OPs that foreshadowed the 
problems we will talk about today, the problems that were to 
come.
    They said, among other things, many of the failed CO-OPs 
could not identify their senior leadership team. Seven of the 
12 had serious deficiencies in their enrollment strategy--which 
later turned out to be a chief reason for CO-OP failure. Many 
of them submitted budgets that were incomplete, unreasonable, 
not cost-effective, or that did not align with the CO-OPs' own 
financial projections.
    Those financial projections were not so hot either. 
Deloitte warned that several CO-OPs relied on unreasonable 
projections about their own growth. As just one example, 
Deloitte noted that CoOportunity--the CO-OP for Iowa and 
Nebraska that I imagine Senator Sasse will be talking about a 
little later--had a target profit ``much lower than the 
industry benchmark'' of 4.8 percent. That was an 
understatement: CoOportunity's stated target profit margin was 
0 percent.
    Nevertheless, HHS approved all the loan applications to the 
failed CO-OPs, to the tune, again, of $1.2 billion.
    After they entered the marketplace in 2014, the CO-OPs' 
financial health deteriorated rapidly. And HHS knew it. The 
Department regularly received key financial information from 
the 
CO-OPs, including monthly reports and audited quarterly 
financial statements. These reports showed that, starting 
almost immediately, the failed O-OPs experienced severe 
financial losses that exceeded even the worst-case scenarios 
outlined in their loan applications to HHS. Cumulatively, by 
the end of 2014, the failed 
CO-OPs exceeded their projected worst-case-scenario losses by 
at least $263.7 million--which is four times above the 
projection.
    The CO-OPs' enrollment numbers were no less problematic. 
According to the 2014 monthly reports submitted to HHS, five of 
the failed CO-OPs dramatically underperformed enrollment 
projections, while five others overshot their projections by 
wide margins. Both errors can cause serious financial losses. 
And they did. Low enrollment means insufficient income to cover 
expenses, of course, but excessively high enrollment was an 
even greater threat to solvency because it multiplies losses 
rather than profits when those premiums are underpriced--as 
many of the CO-OPs' premiums were.
    Despite having that information at its fingertips, HHS did 
not step in. The Department's loan agreements with the CO-OPs 
entitled it to invoke a number of accountability tools for 
borrowers who were missing the mark, but here HHS chose to take 
a pass. Inexplicably, for over a year, the agency took no 
corrective action, nor did it put any CO-OP on enhanced 
oversight. Five of the 12 failed CO-OPs were never subject to 
corrective oversight. Five of the 12 failed CO-OPs were never 
subject to corrective action by HHS, and HHS waited until 
September 2015 to put five others on corrective action or 
enhanced oversight. Two months later, all 12 CO-OPs had failed.
    HHS also had the power to stop disbursing funds if a CO-
OP's financial viability was in doubt. It never did to the 
bitter end. Instead, over the course of 2014 and 2015, HHS 
disbursed $848 million in Federal loan dollars to the failed 
CO-OPs, even as those entities lost more than $1.4 billion. 
That is about $1.65 in losses for every $1 that HHS gave them. 
Think about that.
    More unbelievable, near the end of 2014, HHS approved 
additional solvency loans for three of the failed CO-OPs that 
were in danger of being shut down by State regulators for 
having insufficient capital--despite clear warning signs that 
those CO-OPs could not turn things around. Here again HHS asked 
Deloitte to complete an external review of the CO-OPs' 
application for additional solvency loans and their plans to 
improve their finances going forward. But according to 
Deloitte, HHS truncated its review of these applications. 
Deloitte did not evaluate, for example, ``the likelihood that 
each CO-OP would achieve sustainable operations based on the 
revised business plan''--which I would have thought was the 
whole point. But even the limited analysis that HHS allowed 
Deloitte to conduct pointed to clear warning signs that 
CoOportunity, the New York CO-OP, and the Kentucky CO-OP did 
not have a sound plan to regain their footing.
    Nevertheless, these three CO-OPs alone received $355 
million in additional solvency loans from the taxpayers. All 
have failed, by the way. The Kentucky CO-OP collapsed after 
suffering losses of over $50 million in 2014 and another $115 
million in 2015. At the time of CoOportunity's closure, that 
company's operating losses exceeded $163 million. And most 
staggering of all, after HHS gave the New York CO-OP $90 
million to prolong its financial life rather than allow it to 
scale down, that CO-OP went on to lose another $544 million in 
2015.
    The financial aftermath of all this is dire. The 
Subcommittee obtained the failed CO-OPs' most recent financial 
statements, and those statements show that none of the failed 
CO-OPs have repaid a single dollar--not a single dollar--
principal or interest, of the $1.2 billion in Federal loans 
they received. In my view, it is unlikely they will pay any 
significant fraction back. The latest statements show that the 
failed CO-OPs' non-loan liabilities exceed $1.13 billion--which 
is 93 percent greater than their reported assets, including 
money they expect to receive. On top of that, they owe $1.2 
billion to the Federal Government. As we said, we should not 
hold our breath on repayment.
    The American taxpayer is not the only creditor that stands 
to suffer large losses due to the failure of the CO-OP Program. 
The latest balance sheets we obtained show the failed CO-OPs 
have more than $700 million in unpaid medical claims to doctors 
and hospitals. Unpaid medical claims. In some States, these 
losses will be absorbed by other insurance companies--which 
means by the policyholders of other insurance companies who 
have to pay increased premiums. This is going to go back to our 
constituents, again, to the taxpayer. In other States, doctors, 
hospitals, and individual patients stand to suffer large out-
of-pocket losses due to the CO-OP failures, as our report 
details. We will talk about this more in relationship to the 
New York CO-OP.
    These failed CO-OPs were a costly experiment gone wrong, 
and real people got hurt, including the more than 700,000 
Americans who lost their health plans. Today I plan to ask HHS 
whether they accept any responsibility for the taxpayer waste, 
the disruption to consumers, and the losses to doctors and 
hospitals that the 
CO-OPs' failures have wrought.
    At this point, I would like to ask my colleagues if they 
would like to make opening statements. All of you are welcome 
to do so. Senator Sasse arrived first, and, Senator Sasse, 
again, as I mentioned earlier, you have done a lot of work on 
the issue of CoOportunity and its effect on your constituents 
in Nebraska. And I appreciate your being involved in this 
issue, and I wonder if you have an opening statement.

               OPENING STATEMENT OF SENATOR SASSE

    Senator Sasse. Yes, thank you, Chairman Portman, for your 
leadership and for holding this important hearing today. I 
would also first like to acknowledge our colleague and Ranking 
Member, Senator McCaskill. We all wish her well and a speedy 
return to the Senate.
    Today's hearing is about the families who lost their health 
care plans. It is about the taxpayers who were swindled. It is 
about the bureaucrats who mismanaged this program. And it is 
about the local governments who had to cut budgets from 
firefighters and schools to make up for Washington's failures. 
Everyone in this room--Republican and Democrat--has a duty to 
their constituents to get the whole story.
    The Affordable Care Act's CO-OP Program created 23 not-for-
profit health insurers using $2.4 billion in ``loans'' from the 
taxpayer.
    Less than a year into operation, the financial condition of 
many of these CO-OPs was unstable at best. As today's report 
being released by the Committee shows, the Centers for Medicare 
and Medicaid Services (CMS') own private consultant, Deloitte, 
warned that this was the case. Despite this, CMS continued to 
disburse loans and then began awarding additional loans to 
these troubled 
CO-OPs. Since then, 12 of the 23 have gone out of business, 
representing a CO-OP failure rate of more than 50 percent.
    Sadly, there were about 740,000 Americans covered by these 
12 defunct insurance companies that were given $1.2 billion in 
so-called loans from the taxpayer. As we have suspected for 
some time, this Subcommittee's report concludes that these 
loans will never be repaid.
    When these companies failed, they imposed varying degrees 
of disruption on their enrollees and the markets in which they 
operated.
    Unfortunately, the mess caused by this program began in my 
State with the abrupt failure of CoOportunity Health. 
CoOportunity was headquartered in Iowa, but it operated in both 
Nebraska and Iowa. And the newly created insurer was given a 
total of $145 million of taxpayer-funded loans. Things seemed 
to be going well at first when CoOportunity announced they had 
signed up far, far more enrollees than they had anticipated.
    However, despite ample funding and more than enough 
enrollees, on December 16, 2014, as people were signing up for 
their 2015 coverage, the Iowa Insurance Commissioner placed 
CoOportunity under a supervision order. One month later, in 
January of last year, the Iowa Insurance Commissioner said 
rehabilitation of CoOportunity would be impossible, and he 
sought a court order for liquidation. After just one year of 
operation, the new not-for-profit health insurer would collapse 
completely.
    When CoOportunity failed, 120,000 enrollees, a majority of 
these being Nebraskans, had their coverage canceled and were 
forced to find new insurers. But the collateral damage from 
CoOportunity's failure does not end there for Nebraskans. 
CoOportunity, of course, owed millions of dollars, as Chairman 
Portman has mentioned, to doctors and hospitals for claims by 
its enrollees that will not be repaid.
    To address the insurer collapse, the State of Nebraska has 
a guaranty fund that pays claims in the event of insurer 
collapse, such as CoOportunity's, and the guaranty fund is 
financed by assessments on other insurance companies selling 
similar plans in our State, prices that were at market rates, 
unlike what CoOportunity offered originally, and that is why 
they had far too many enrollees, because there was not 
competence to run this program.
    To help pay for CoOportunity's unpaid claims, insurers in 
Nebraska were assessed fees totaling about $47 million last 
year alone. It should be noted that this sum was not even 
enough to cover CoOportunity's losses and that the guaranty 
fund had to take out a loan. As CoOportunity has no remaining 
assets, it is improbable that the guaranty fund will ever be 
repaid this $47 million. In other words, it will be assessed 
onto other insurers in the market.
    These insurers had to pay CoOportunity's outstanding bills, 
and there is no reason to believe that CoOportunity will ever 
pay any of this money back. As a result, Nebraska tax revenues 
will be decreased by $47 million because these insurers are 
subsequently able over a 5-year period to reduce their tax 
liability to the State in the amount of their contributions to 
bail out CoOportunity.
    This means that my State will have much less revenue to pay 
for priorities like education, roads, firefighters, and other 
local government issues. Thus, Nebraskans are going to have to 
pay for the CoOportunity failure again, first as individuals 
became uninsured and now as taxpayers have to bail out 
CoOportunity, on top of the $145 million that they as taxpayers 
made in Federal loans to CoOportunity.
    As previously mentioned, 11 other CO-OPs have now failed, 
likely initiating variations of this same story across 11 more 
States. Moreover, depending on the viability of the 11 
remaining CO-OPs, it could happen in more States in the years 
to come. Indeed, of the 11 CO-OPs that remain in operation, we 
know that as of February 25th, CMS had placed 8 of the 11 under 
corrective action plans. In addition, updated financial reports 
show that conditions here have gravely worsened for the four 
CO-OPs with data available for the fourth quarter of 2015.
    Despite this mess, CMS has to date offered very little in 
terms of a substantive explanation for the problems. I have 
been questioning the Department since last May about all of 
this after only one failure. We now have 12 and potentially 
more on the horizon. I have sent four letters to your agency 
over the course of this period and have been working alongside 
Chairman Portman and the Ranking Member to request documents to 
unearth the cause of this debacle.
    HHS owes all CoOportunity enrollees and all Federal 
taxpayers, and particularly taxpayers in my State, an answer. I 
look forward to this hearing, and I hope for some new and 
actual substantive answers from the witness panel today.
    Thank you.
    Senator Portman. Thank you, Senator Sasse. Senator Ayotte.
    Senator Ayotte. I want to thank the Chairman for holding 
this important hearing. I do not have an opening Statement. 
Thank you.
    Senator Portman. Thank you. Senator Lankford
    Senator Lankford. No opening Statement.
    Senator Portman. Thank you. Excellent. We will now call our 
first panel of witnesses for this morning's hearing.
    Andy Slavitt is the Acting Administrator for the Centers 
for Medicare & Medicaid Services. Before becoming Acting 
Administrator, he served as Principal Deputy Administrator 
beginning in July 2014. Before joining CMS, he was group 
executive vice president for Optum, where he oversaw the 
delivery of clinical, technical, and operational solutions to 
health care clients and consumers, including the Department of 
Health and Human Services.
    Kevin Counihan is the Marketplace Chief Executive Officer 
(CEO) and CMS Deputy Administrator. Before joining CMS, he 
served as CEO of Connecticut's health insurance exchange, 
AccessCT.
    I appreciate both of you for being with us this morning, 
and we look forward to your testimony. It is the custom before 
this Subcommittee to swear in all witnesses, so at this time I 
would ask you to please stand and raise your right hand. Do you 
swear that the testimony you are about to give before this 
Subcommittee will be the truth, the whole truth, and nothing 
but the truth, so help you, God?
    Mr. Slavitt. I do.
    Mr. Counihan. I do.
    Senator Portman. Thank you. Having heard in the 
affirmative, I appreciate your being here again, and your 
written testimony, you should know, will be printed in the 
record in its entirety, and we would ask you to try to limit 
your oral testimony to 5 minutes each.
    Mr. Slavitt, we will hear from you first.

TESTIMONY OF ANDY SLAVITT,\1\ ACTING ADMINISTRATOR, CENTERS FOR 
                  MEDICARE & MEDICAID SERVICES

    Mr. Slavitt. Thank you. Chairman Portman, thank you, and 
Members of the Subcommittee. And I also want to offer my best 
to Ranking Member McCaskill as well. And thank you for the 
invitation to participate in this hearing on the CO-OP health 
insurance companies.
---------------------------------------------------------------------------
    \1\ The prepared joint statement of Mr. Slavitt and Mr. Counihan 
appear in the Appendix on page 50.
---------------------------------------------------------------------------
    I know you are all aware of the challenges that the CO-OPs 
have faced, 12 having closed their doors prior to the end of 
2015. And I understand the questions that you have about how 
CMS provides oversight to CO-OPs, how CMS makes awards 
decisions, and CMS' level of accountability when a CO-OP 
closes.
    As you know, the Affordable Care Act allocated over $2 
billion to start the CO-OP Program, the idea to stimulate new 
local competition in an industry that has a history of being 
very difficult for small companies to enter, with some entering 
markets that had not seen a new competitor in decades.
    Let me first clarify our oversight purview. Under law, the 
Federal Government is not granted authority reserved for the 
States; analyzing and actuarially certifying rates and surplus 
levels, and determining who is qualified to offer insurance 
during open enrollment. CMS' responsibility is to award and 
oversee funds and ultimately maximize the likelihood that 
taxpayer funds are returned.
    CO-OPs were selected and 85 percent of the loans were made 
prior to the start of the first open enrollment in 2015. The 
remaining 15 percent of funds were awarded during 2014. Loans 
were made through an evaluation process and review and scoring 
from a third party, which resulted in 16 percent of 
applications being granted loans.
    By the time I took this job in 2015, having come out of the 
private sector, all the loan funding had been obligated, and my 
principal focus was to ensure we had the best possible 
oversight practices. One of the first things I did was hire an 
independent actuarial consulting firm to do a risk assessment 
of all the companies afresh.
    Now, from that, our approach was driven by three unique 
challenges in overseeing CO-OP loan programs:
    First, the challenges CO-OPs have had should not be viewed 
as a CO-OP problem but as a small business startup problem in a 
very difficult industry. And I hazard to say that all of the 
small companies experienced similar challenges, CO-OP and 
non-CO-OP.
    While we were making loans to companies with 30 to 50 
employees, they are typically competing with companies with 
multiple thousands of people and worth tens of billions of 
dollars in capital. Having run a startup in the past myself, 
trial and error is part of creating success, and in this 
situation, with the limited capital available and competing 
against giants, the CO-OPs had very little room for error.
    Second, as Mr. Counihan will elaborate on in a moment, 
across the marketplace, during 2014 there was actually very 
limited actual performance information available before plans 
filed rates for the 2015 year and for the CO-OP oversight team 
to evaluate the financial position of the CO-OPs. Unlike almost 
every other business, in insurance you get to make one pricing 
decision per year, and you live to see the outcome. This is why 
our decisions to shut down the CO-OPs were largely made prior 
to the third open enrollment period.
    Finally, all of the loan funding had been granted. Our 
strongest remaining tool from oversight is to call the loan, 
which I can tell you we did not take lightly, as it had 
ramifications for disrupting consumers, as you know, and would 
certainly not have increased the collectability of the CO-OP 
loans.
    In light of these three challenges, we set up an extremely 
active oversight process, which Mr. Counihan will cover in more 
detail. We created other oversight tools, new methods of 
gathering information, and focused decisions around key events 
like open enrollment. We were guided by the view, and are 
guided by the view, that the best way to maximize the 
opportunity for Federal loans to be repaid is if the CO-OP 
makes it through the startup stage when most failures occur and 
reaches a point of stability. Absent that, I have expected our 
team to be sober in their assessments and make difficult 
judgments. And they have, making recommendations to withhold 
funds, to place CO-OPs on corrective action plans, and to work 
with States to shut down operations when that is what the 
analysis suggested.
    Mr. Counihan represents by almost anyone's description as 
knowledgeable and capable an executive as there is in these 
matters, and he and his team have not hesitated to make tough-
minded calls. I recognize that when any program does not fully 
succeed, it raises important questions for you. We, too, go 
through after-action review to see what we would do differently 
and could improve.
    Ultimately, our goal at CMS is to make sure that the 
programs we are charged with are working as they should for 
American families. Today more than 90 percent of Americans have 
health coverage, and even in States where CO-OPs proved 
unsuccessful, in the first year the overall uninsured rate 
decreased by 20 percent and has continued to improve.
    Challenges like the ones we are discussing today are part 
of every program, and we must always be ready to work with them 
transparently, with urgency, with accountability, and in the 
best interests of taxpayers and consumers.
    So thank you, Mr. Chairman, for allowing me these few 
minutes, and, of course, we will be pleased to take your 
questions.
    Senator Portman. Thank you Mr. Slavitt. Mr. Counihan.

  TESTIMONY OF KEVIN COUNIHAN,\1\ MARKETPLACE CHIEF EXECUTIVE 
   OFFICER AND DEPUTY ADMINISTRATOR, CENTERS FOR MEDICARE & 
                       MEDICAID SERVICES

    Mr. Counihan. Thank you. Chairman Portman and Members of 
the Subcommittee, thank you for the invitation to discuss the 
CO-OP Program with you.
---------------------------------------------------------------------------
    \1\ The prepared joint statement of Mr. Counihan and Mr. Slavitt 
appear in the Appendix on page 50.
---------------------------------------------------------------------------
    The team at CMS has the charge to specifically oversee the 
Federal loans made to these startups with the goal of 
maximizing the return taxpayer funds, supporting the CO-OPs so 
that consumers have access to uninterrupted competitive 
insurance coverage, and providing information to State 
Departments of Insurance (DOIs) so they can make the best 
possible decisions about the future of the CO-OPs in their 
State.
    Like Andy, I came to CMS from a long career in the private 
sector. I have had executive roles in insurance companies, and 
I have overseen four successful health insurance exchanges.
    Leveraging our experience, we worked with the teams to 
build and improve the oversight operation for the CO-OP loans 
that includes tailored oversight protocols, a formal risk 
committee, and an enhanced monitoring process. These processes 
are robust, have built-in controls, including reviews from 
independent firms, and utilized the knowledge of top financial 
professionals and actuaries.
    The lifeblood of any oversight process is, of course, data-
driven decisionmaking. I will pick up on something Andy said. 
Our oversight team at CMS makes the best decisions they can 
based on the information available at the time.
    I think it is important to explain more about the 
information available to the CO-OPs, the State Departments of 
Insurance and CMS. In insurance, you know your revenues 
relatively quickly. What you do not know for some time are your 
real claims costs because of the back-weighted nature of how 
care is consumed in the year and the lag time in how claims are 
submitted, processed, and paid.
    Due to the lag in claims data, as we neared the end of 
2014, meaningful and complete data from the first and second 
quarters of the year was all that was available. The first 
reliable financial information on the CO-OPs' 2014 performance 
from actual claims only became available in the middle of 2015. 
This was well after pricing decisions for plan year 2015 were 
made by the CO-OPs, well after funding decisions needed to be 
made by CMS, and well after certification and licensing 
decisions needed to be made by the State Departments of 
Insurance for 2015 open enrollment.
    Even when information is not readily available, we 
aggressively gather and analyze the best information we can on 
program performance and early warning signs. We used each of 
the oversight tools at our disposal to support and correct the 
CO-OPs on issues identified. In 2015, we conducted 27 financial 
and operational reviews, 16 in-person visits, and had 43 
communications, not to mention hundreds of phone calls with the 
CO-OPs. This work is done in close collaboration with the State 
Departments of Insurance who have the full authority over all 
insurers in their State.
    As Andy said, we have several oversight tools short of 
calling a loan, including corrective action plans and using the 
leverage of cash disbursements when possible to push for 
performance improvement. Approximately one-third of the time, 
we have withheld some or all of a requested disbursement until 
the companies more clearly demonstrated the need or took some 
other action.
    This tool had limitations as not funding a cash 
disbursement would cause a company to be out of State 
compliance, be unable to pay claims, and ultimately default on 
their loan. Even with the oversight and support provided by CMS 
and the Departments of Insurance, having operated insurance 
businesses, I can tell you that the outcomes of these companies 
are very much in their own hands, more so than either their 
regulators or lenders. For the existing CO-OPs, we are now 
reviewing their fourth quarter financials and the results of 
the most recent open enrollment period. Plan Year 2016 is a 
critical year for these CO-OPs. They must move from startup to 
stability and improve their financial capabilities, which are 
vital for their ability to predict, manage, and control costs.
    For the CO-OPs that are in the wind-down process, we are 
working with the Department of Justice (DOJ) to use every tool 
at our disposal to maximize recovery of Federal funds owed, 
including recently at the request of DOJ putting a hold on tens 
of millions of funds as the process plays out.
    CMS will continue to work closely with this Subcommittee, 
the CO-OPs, and the State Departments of Insurance to provide 
the best outcome for consumers and taxpayers. We appreciate the 
Subcommittee's interest, and I am happy to answer any of your 
questions.
    Senator Portman. Thank you, Mr. Counihan. We will have a 
number of questions, and I appreciate you both being here and 
your testimony.
    I will say some of what you have just said confuses me, at 
least as to the period 2014 and 2015. You talk about not having 
adequate information, I think very limited information for HHS 
to review. You talk about a lag in data. HHS had monthly 
financial data to work with. You received the quarterly 
financial reports, Q1 by mid-May, Q2 by mid-August, so there 
was plenty of time to put the failed CO-OPs on a corrective 
action plan or to cut your losses before sending them into open 
enrollment in 2015. So I just do not think that is accurate.
    It is interesting also when you say, Mr. Slavitt, our 
strongest tool is to call the loan. You have a lot of other 
tools, and Mr. Counihan actually has laid out some of those 
tools to deal with CO-OPs: corrective action plans, we talked 
about enhanced oversight plans, termination, of course. Ms. 
O'Brien, who is your CO-OP program director, told us these are 
all very valuable tools, and I know you are using them now more 
frequently, but our question is: How did this happen?
    Throughout 2014, HHS did not use the tools at all with 
respect to these failed CO-OPs. In fact, 5 of those 12 CO-OPs 
we have talked about were never put on a corrective action or 
enhanced oversight plan despite the fact, again, that you were 
receiving these regular monthly and quarterly financial reports 
showing massive losses. By the second quarter of 2014, 6 of the 
12 failed CO-OPs reported net income losses that exceeded the 
worst-case scenario in their own business plans. By the end of 
the year, 10 of the 12 had exceeded their projected worst-case-
scenario losses for 2014 by at least 300 percent--$263 million.
    So I just do not think it is accurate to say you did not 
have information and that there was a lag time that made it 
impossible to respond. It is just not accurate. The loan 
agreement says enhanced oversight plans should be used when a 
CO-OP ``consistently underperforms relative to its business 
plan.'' That is in the agreement. How could consistent monthly 
losses exceeding the worst-case scenario by 300 percent not be 
considered underperformance? I guess I would ask you that, Mr. 
Slavitt.
    Mr. Slavitt. Sure. Thank you. And let me just start by 
saying these are very fair and appropriate questions, and they 
are questions that I have asked myself. To go back and look at 
2014, obviously, a lot of this was before my time.
    You may remember that in 2014 the exchanges got off to what 
I might charitably call a ``slow start.'' Open enrollment had 
to be extended, and so membership did not start to come until 
late. And then, of course, the way health insurance works, 
people have deductibles, so claim filings do not start to 
happen for a while. And as Mr. Counihan described, you do not 
really get an accurate picture. And, look, I have been in this 
business a long time. You do not really get a good, accurate 
picture. Certainly in my view, the question I ask is: Did the 
people on the CO-OP team have enough information to effectively 
shut down a CO-OP or call a loan? Because if they did not 
continue to disburse a loan, they would, in effect, put the 
plan out of compliance, and then obviously the kind of 
situation that we had in Nebraska and Iowa is not the kind of 
situation we wanted to be in.
    And I will say, to be fair, as I look back about things we 
would have done differently, I will say that CoOportunity 
should never have been allowed to go into the 2015 year, either 
by the CO-OP or by ourselves. And I think that is a very fair 
criticism in looking back, and I think that is something that 
we would all say.
    When I look at the other CO-OPs and I look at all the 
evaluations, notwithstanding that many of them were ahead of 
their business plan on membership, some were behind, I can tell 
you that the expression that once you have your first customer, 
your business plan goes out the window, it is very true. The 
team I think did the best job they could of evaluating the 
information they had. But 3 to 6 months into a CO-OP being off 
the ground as a startup, when I look at it--and, again, this is 
my opinion--and a reasonable person could reach a different 
judgment. But when I look at it, I look at the CO-OP team's 
work, and I find it very difficult to criticize them, with the 
exception of CoOportunity, for letting those CO-OPs move 
forward into the 2015 open enrollment year, reset their 
pricing, which was allotted to them and approved by the 
Departments of Insurance, who also thought they should move in, 
and to move forward and see what happened in 2015.
    Obviously, looking back on judgments today, we have 
information we did not have then about how their claims 
developed, and I think that is why these are very fair 
questions.
    I do not know, Kevin, if you want to add anything.
    Mr. Counihan. I guess what I would just add is, based on my 
experience, startup health insurance companies are very high 
risk. Over half of them fail. They take 3 to 5 years to 
stabilize and mature. It is seductive to look back and say look 
at what happened after a certain amount of period and say, you 
should have done something here and, if you look at open 
enrollment, for example, in that period and when it ended, it 
took us until October into November to actually have any 
credible experience, because in the first 3 months there is 
literally very modest utilization. And then it continues to get 
a little bit better in the fourth and fifth and sixth months, 
which is one of the reasons when issuers set their rates for 
2015, they were setting their rates on manual rates, not based 
on experience. 2016 was the first year in which issuers 
actually had credible claims experience to set their rates 
from.
    So, again, a lot of different factors. It is dynamic, and 
it is complicated.
    Senator Portman. Yes, look, I know you were not there, but 
I just think it is totally inappropriate for you all to say, as 
Mr. Slavitt just did, they did the best job they could with the 
information they had, and that somehow, this is just a problem 
with startups.
    First of all, we are talking about taxpayer money, $1.2 
billion certainly lost, 700,00-plus people losing their health 
care, and somehow you guys seem to be saying that is just fine.
    In terms of startups, these CO-OPs failed at a much higher 
rate than the average startup. In fact, they did that despite 
the fact that they had something that no startup I have ever 
known has, which is millions of dollars in subsidized 
government loans. You say you have been in business a while. 
Wouldn't you have loved to have those millions of dollars in 
subsidized loans? You say that they did not have information. 
Let us talk about that. By March 2014, two of the CO-OPs--this 
is 2014--CoOportunity and New York CO-OP, had already exceeded 
their high enrollment projections for the year. We talked about 
that as being one of the data points you are supposed to look 
at. They exceeded their scenario by more than 150 percent 
within the first month of enrollment. By the end of March 2014, 
New York CO-OP had more than doubled the high enrollment 
scenario in its feasibility study. There was plenty of 
information out there, and, again, you were not there. I am not 
blaming you personally, but for HHS not to take some 
responsibility or any accountability--were there any objective 
standards for deciding when underperformance would trigger an 
enhanced oversight plan?
    Mr. Slavitt. Yes.
    Senator Portman. And what were those?
    Mr. Counihan. Well, it depended. There was a series, Mr. 
Chairman, of what those could be. But one thing I would just 
like to note----
    Senator Portman. But what were the objective--because let 
me just tell you something so I am not surprising you. And, 
again, we gave you guys this report to look at, OK? And we are 
trying to be fair here. It is a thorough report. You gave us 
some comments. We took your comments. But here is what we heard 
from the person who is in charge of the CO-OP Program, the CO-
OP director. She told the Subcommittee there was no standard, 
no objective standard. She said there still is not a standard, 
by the way. It is done on an ad hoc basis. That is information 
that we have. So to say that there is and was assurance 
objective standard for deciding when underperformance should 
trigger an enhanced oversight plan, that is not what we 
learned. So, as manager of this $2.4 billion portfolio, do you 
not think it would have been good to have some kind of a metric 
to decide when enhanced oversight was appropriate?
    Mr. Slavitt. So, thank you, and the thing that I would say 
is what I think the team does goes a level further than just 
having a standard rote plan. They really get into these 
businesses because they are at such an early and precarious 
stage. And as Kevin described, we sent our teams out into the 
field not just to evaluate but to provide technical assistance 
and the best advice that we can relative to how these CO-OPs 
perform.
    I will tell you that even when we put a CO-OP on an enhance 
oversight plan, it is not a silver bullet because the reality 
is that CO-OPs themselves have to perform. They have to price 
right, they have to have a good enrollment strategy, they have 
to sell, they have to service. And the Departments of Insurance 
are watching them every step of the way to make sure that they 
are doing it right, and I think everybody watches with a set of 
nervousness because these are such early and precarious 
operations.
    So it is absolutely at least--and I can speak more to the 
time since I have been here and since Kevin has been here, 
there has been very intense activity----
    Senator Portman. Let me just--not to interrupt, we are 
talking about 2014 into 2015.
    Mr. Slavitt. Yes.
    Senator Portman. And, I do not know what the level of 
losses needed to be. Certainly 300 percent was not enough. But 
you did not have standards in place that enabled you to react 
quickly enough to be able to save this hemorrhaging of taxpayer 
dollars and the dislocation to all those patients who lost 
their health care.
    Senator Sasse, I will turn to you for questions. Sorry I am 
a little bit over my time. We will come back for another round, 
too.
    Senator Sasse. Thank you, Chairman.
    First of all, before I go to my questions, I just want to 
acknowledge something that Mr. Slavitt said a minute ago. I 
think you said that the CoOportunity failure should have been 
foreseen in 2014, should have never entered 2015. Is that 
correct?
    Mr. Slavitt. I think that is correct.
    Senator Sasse. Well, thank you for that. That is a 
significant admission, so I appreciate your honesty on that.
    More broadly, as far as distinguishing between different 
regulatory responsibilities at HHS and in State Departments of 
Insurance, I understood in your opening statement that you said 
many of these issues are failures of State Departments of 
Insurance, and I think you said that the primary responsibility 
of HHS was to maximize potential repayment of loans to the 
taxpayer. Is that correct?
    Mr. Slavitt. I would not use the word ``failures,'' but I 
think you have the sense right of the delineation of 
responsibilities.
    Senator Sasse. OK. So let us distinguish between 
CoOportunity, which you have acknowledged was a failure of 
oversight, should have never been able to go from 2014 to 2015, 
the next 11 that failed, and the 11 that remain. If one of your 
primary responsibilities is to maximize repayment to the fisc 
and to the American taxpayer, do you expect that there will be 
any repayment to taxpayers from CoOportunity?
    Mr. Slavitt. So I think it is too early to say, but let me 
walk you through how we are approaching this. I think that is 
the fairest way to answer your question.
    Senator Sasse. The place is insolvent. They do not exist. 
You do not think they are actually going to pay any dollars 
back to the taxpayer, do you?
    Mr. Slavitt. Well, so there are three sources of funds that 
we look to, and the Department of Justice is in the lead on 
this, and I think they would be happy to answer your questions 
on these more specifically. And because I do want to maximize 
these recoveries, I do not want to say anything in this hearing 
publicly that is going to hurt my negotiating position or the 
position of the Department of Justice. But, briefly, three 
things that we look at:
    First, after the CO-OP finishes paying claims, which for 
these 11 additional CO-OPs they are going to do roughly through 
the first 6 months of this year. Again, there is this lag 
effect. All the claims are still coming in.
    Second, there are a series of receivables that we, as Mr. 
Counihan said in his opening statement, if you caught it, that 
we have just put a hold on some funds that the CO-OPs have been 
expecting. That is a second source of funds.
    The third----
    Senator Sasse. What are those?
    Mr. Slavitt. They are receivables for things like the 
reinsurance payment, things like that.
    Mr. Counihan. Risk adjustments.
    Mr. Slavitt. And so that is the second source of funds.
    And then the third source of funds is there are lawsuits 
and judgments both with contractors and vendors, and in many of 
these situations--and, again, I do not want to venture into 
someone else's fight. CO-OPs have felt poorly served by some of 
their vendors in terms of providing them enough financial 
information to see the full picture. That is also a potential 
source. So the DOJ, in looking at all three of those 
categories, is taking the lead and pursuing the Federal 
Government's interests. I think it will take some time to play 
this out in the case of all of these situations. Obviously, we 
do not expect 100 percent recovery or anything close to that. 
But we are expecting between those sources and the strategy 
that they pursue that there will be funds recovered for the 
taxpayers.
    Senator Sasse. And if you had to guess, across the 12 
failures, what percentage of their $1.2 billion do you think 
taxpayers will ultimately receive?
    Mr. Slavitt. I cannot guess. It would be irresponsible for 
me to guess. I also do not want to bias our opportunities here.
    Senator Sasse. Would a fair bet on over-under between 100 
bucks? I mean, they are not going to repay any of these moneys.
    Mr. Slavitt. I am not going to take that bait, because I 
want the Department of Justice, as they have asked me to do, to 
let them do their jobs.
    Senator Sasse. To this point about what State Departments 
of Insurance, particularly in Iowa and Nebraska, should have 
done, if we can look at the exhibit book, page 35,\1\ it reads 
that the cash on hand--or CoOportunity Health will ultimately 
be assumed to achieve a total enrollment of 66,101 by the end 
of year 2014, which is 55,000 more than original projections. 
That is pretty extraordinary.\2\
---------------------------------------------------------------------------
    \1\ The exhibit referenced appears in the Appendix on page 176.
    \2\ Additional excel exhibits are too large to be printed in the 
hearing record and are available on http://www.hsgac.senate.gov/
subcommittees/investigations/hearings/review-of-the-affordable-care-
act-health-insurance-co-op-program.
---------------------------------------------------------------------------
    Mr. Slavitt. I am sorry. Can you help me where----
    Senator Sasse. On exhibit book, page 35----
    Mr. Slavitt. Am I looking at----
    Senator Sasse [continuing]. The heading is----
    Mr. Slavitt. Is this what I am looking at?
    Senator Sasse. Yes.
    Mr. Slavitt. OK. And where are the page----
    Senator Sasse. Page 35 is essentially the CoOportunity 
additional solvency loan funding request report submitted to 
CMS in July 2014. The second page of that addendum, there is 
``Critical Assertions.'' Point 1 is about enrollment. There is 
an enrollment table there, and it says that CoOportunity--you 
do not have it?
    Mr. Slavitt. I am not seeing this.
    [Pause.]
    Senator Sasse. So the overenrollment in CoOportunity is 
extraordinary, I mean, both of you having had private sector 
experience. I have not worked in the insurance space like you 
all have, but I have never heard of any startup business 
overperforming its projected volume of subscriber base by 
anything like this.
    Mr. Slavitt. Right.
    Senator Sasse. I think you are going to say that this is 
primarily a Department of Insurance in Iowa and Nebraska 
problem, but I guess I have two lines of questioning there. One 
is: Were you talking to them? And if not, on what basis would 
you possibly 
have--your Department. I recognize that you were not there 
personally, but on what basis would your Department have 
possibly concluded that they were solvent and that their 
pricing was right? Because one more bit of context. Other 
insurers in the State and brokers in the State were talking 
widely across Nebraska that we have 93 counties, and we have 
two metropolitan regions, Omaha and Lincoln, and we have a 
whole bunch of cattle country. And pricing in rural places is 
complicated because you only have a couple of hospital systems. 
We have a Catholic health system, we have a University of 
Nebraska system, and you have a few small independent 
freestanding hospitals. And trying to project utilization and 
rates a year into the future is difficult, and so the insurers 
and the brokers in our State have a rough sense of how pricing 
should work, and everybody who knew anything knew that 
CoOportunity was pricing way too cheap. They did not know what 
they were doing. And yet you all gave them additional money.
    So either you should have known that they were incompetent, 
or you are going to assert that the Departments of Insurance in 
Iowa and Nebraska should have known. And then I wonder if you 
were talking with them. On what basis would you make the 
decision to give them additional loans.
    Mr. Slavitt. I am not going to pass the buck. Looking at 
it, we both should have known, I think particularly relative to 
moving into 2015.
    A couple things. As we have done our autopsy on that 
situation, we do think that they underpriced perhaps, and also 
that their benefit designs attracted disproportionately sicker 
populations. And when things go bad, they go bad fast.
    So by no means do I want to point the finger at either 
Nebraska or Iowa State Department of Insurance. Kevin spent a 
ton of time talking to them, and so he can talk through a lot 
of--we were in constant contact, constant dialogue, because it 
is challenging. And when things start to go fast, they go fast 
in an awful hurry. So if someone beats their projections on 
revenue, some will look at that as a good thing. They will 
present that as, ``Hey, look at how great I am doing. More 
people like our product.'' Others will look at it and say, 
``Well, gee, the reason you beat your projections is you 
underpriced your product.'' And because they do not have a 
chance to correct it until the next year, they have to live 
through the entire year with whatever price they set.
    So the real decision point should have been what do we do 
about entering the next year, because that is the point in time 
when they should have known. Obviously, as you have pointed out 
and you well know, the situation deteriorated pretty rapidly, 
and I think it became apparent to everybody involved and 
everybody looking at the data, both the departments and 
ourselves, that we should have taken action.
    Senator Sasse. And, Mr. Counihan, I will go to you, and 
then I know that I have to yield back to the Chairman. But the 
120,000 people who became uninsured in Nebraska and Iowa became 
uninsured with plans that they re-enrolled in in December 2014 
and had knowledge basically that they were going to be 
uninsured by the end of January 2015. So as far as going bad 
fast, I will acknowledge that. And yet people who were 
uninsured for the 11 months of 2015, so obviously that is a 
complete regulatory travesty. But I think it begs questions not 
only about the decision to fund the additional loans, but what 
kinds of technical assistance was possibly----
    Mr. Slavitt. I think folks----
    Senator Sasse [continuing]. Provided to these insurers.
    Mr. Slavitt. I am sorry to interrupt. I think folks got 
covered. About 40 percent of people in Nebraska opted for 
another plan. The other 60 percent were covered by the guaranty 
fund, and we can certainly talk about guaranty fund----
    Mr. Counihan. I do not think anybody lost coverage, 
Senator.
    Mr. Slavitt. There is a cost, certainly a cost to the State 
of the guaranty fund, typically borne by the insurers, and we 
can talk about the merits and the challenges of that. But our 
priority at the time was to set up a team to focus on each 
individual in Iowa and Nebraska and track their cases and make 
sure that people did get coverage. It was disruptive for them, 
so I am not going to excuse that. But we did track that.
    Mr. Counihan. Yes. And, you made some good insights about 
the market in Nebraska. Frankly, we depend on the Departments 
of Insurance to really have that same kind of insight, much 
more than we are going to have. The rates that you talked about 
are actuarially developed. They have to be presented to the 
actuary in the actuarial departments of each State Department 
Insurance. They are walked through; the assumptions are kicked. 
Those DOIs do a pretty good job of trying to understand what 
the rates ought to be, and we trust them. And as Andy said, we 
got intimately involved in that transition.
    You look back and say, ``Could we have done something 
differently?'' In retrospect, you bet. But what we tried to do 
is acknowledge, move on, learn from it, and make sure that 
those patients in both States got coverage.
    Senator Sasse. Thank you.
    Senator Portman. Thank you, Senator Sasse.
    Let me just follow up on one of the questions you had, 
which is, will these Federal loans ever be repaid? And the 
answer was we are not going to talk about it, that the 
Department of Justice is working on it. The real answer, of 
course, is no. Our investigation shows that in the aggregate, 
the failed CO-OPs' non-loan--this is non-loan liabilities, that 
is, not even counting what they owe the Treasury, exceed $1.13 
billion, which is 93 percent greater than the reported assets. 
So just in case you did not know that, if you get asked that 
question again, I think your answer is, ``Where is it going to 
come from?'' I mean, we are talking about failed CO-OPs' non-
loan liabilities, forgetting the $1.2 billion we talked about, 
exceed $1.13 billion, which is 93 percent greater than the 
reported assets. So I think it is a near certainty that you are 
going to have a complete loss here in addition to the 
dislocation that we talked about.
    Let us talk for a second about another issue that was 
raised briefly but one that concerns me a lot, and I think 
continues to be a huge problem with the way in which this was 
handled back in 2014 and 2015, and that is the issue of unpaid 
medical claims. In certain States, as you know, there is a 
substantial amount of unpaid claims, and one example would be 
New York. Health Republic of New York currently has $157 
million in assets according to the latest balance sheet. It 
also has $379.5 million in unpaid medical claims. So their 
unpaid medical claims are well in excess of their assets, a 
shortfall of about $221 million, even if all those assets were 
devoted just to pay the doctors and the hospitals and the 
clinics and the patients that relied on it for their insurance 
payments.
    In other States, that shortfall might be covered your 
statewide guaranty funds, as was talked about today, including 
Nebraska, in which other insurance companies basically chip in 
to cover the losses, or sometimes it is an unfunded mandate on 
the States. But in New York, the CO-OPs' unpaid medical claims 
are not covered by a guaranty fund. So I guess, Mr. Counihan, 
my question to you is: What is going to happen to these claims? 
Doctors, hospitals, patients are likely to go unpaid, right?
    Mr. Counihan. I know the New York situation extremely well, 
Senator.
    Senator Portman. What is going to happen?
    Mr. Counihan. In all likelihood--I do not know the complete 
answer to that question yet. They are still going through a 
complicated wind-down process. So in all honesty, it is 
premature for me to say. But you are right in what you said, 
which is New York is a State that does not have a guaranty fund 
for health insurance. They have guaranty funds for many other 
insurance coverages. At present, they do not have one for 
health insurance.
    Senator Portman. The experts tell us that, if anything, the 
year-end claims numbers are likely to turn out even worse than 
they are now, that it is not going down, it is going up. And I 
just do not know how you can imagine that these claims are 
going to be paid when, again, you have a balance sheet that 
shows $379.5 million in unpaid medical claims, a shortfall over 
its assets of $222 million, even, again, if all those assets 
were just devoted to these unpaid medical claims.
    Mr. Slavitt. Yes, and I do not know that they are. I would 
like to----
    Senator Portman. You do not know that they are----
    Mr. Slavitt. I do not know that they are going to be paid. 
I would like, though, to talk a little bit about New York in 
this context. But I also have to say the numbers you quoted me 
about assets and liabilities, with due respect I need time to 
review this report. Some of our staff got to review it in 
camera yesterday, and I am not willing to accept that those are 
the accurate numbers until I have had a chance to review----
    Senator Portman. Well, Mr. Slavitt, with all due respect, 
you are a smart guy, why should we be having to give you 
numbers that are publicly available? Get the numbers yourself.
    Mr. Slavitt. I have--we have our numbers.
    Senator Portman. You should have already had these numbers. 
You are saying that you do not trust our numbers. Again, we 
showed you this report. We gave you the chance to respond to 
it. That is unusual, as you know. We made all the changes that 
you suggested. But you are saying you cannot trust our numbers. 
You should know these numbers. This is your job. Not to know 
what the assets and liabilities are of these companies. Let me 
give you some more numbers because they are accurate.
    Our report points out that in three States with no guaranty 
fund coverage--in other words, no guaranty fund here--failed 
CO-OPs are reporting $500 million in unpaid claims and not 
nearly enough assets to cover them. And we are talking about 
New York, as I said, but also Kentucky, Louisiana. Imagine 
that. You sign up for health insurance in the Obamacare 
marketplace. You pay your premiums on time. You do everything 
right, and you play by the rules. And then your insurance 
company goes bust. And then what happens? The hospital can sue 
you for your unpaid bill, even though you have done everything 
right.
    I mean, I just think it is amazing that you guys are not 
more concerned about this. Can you give all those patients 
assurance that is not going to happen, they are not going to 
get a bill and have to pay twice?
    Mr. Slavitt. We certainly are concerned about all these 
wind-downs, and these wind-downs are complicated processes both 
from the standpoint of the patients, who I think are the first 
priority, the physicians and hospitals who you discuss in the 
context of New York, and also the Federal Government interests. 
So, there are precedents through the course of history of 
health insurance companies winding down. There are processes 
that States run. States have jurisdiction over that process. We 
try to represent our own interests in that process, the Federal 
Government. But I will say we have--and you may criticize us 
for this, but we have released funds--in fact, we have released 
$30 million of funds last year under my authority to CO-OPs 
that were closing down so that they could pay claims for 
consumers. And you could argue that that was $30 million that 
could have been in the Federal Treasury, but we believed it was 
an obligation that----
    Senator Portman. Well, $30 million of taxpayer money. It is 
the same people. These are taxpayers who have found themselves 
losing their health insurance and now potentially facing claims 
from providers because their health insurance company that was 
a federally established, federally subsidized health care 
company went bust.
    Mr. Slavitt. Well, I can tell you----
    Senator Portman. There are some real human costs to this. 
Let me tell you what the New York CO-OP situation is, because 
you question our numbers or you have not looked at the numbers 
yourselves. This is how we got into that mess. It vastly 
overshot its enrollment targets while underpricing its 
premiums, leading to multiplying financial losses. And all this 
information was available to you guys.
    In response, it considered scaling down its operations and 
reducing membership to a sustainable level, but HHS gave the 
CO-OP $90.7 million, so you are talking about giving them more 
money, which it used to scale up and add about 58,000 enrollees 
in 2015. OK? So you made it worse. The resulting losses led to 
a $544 million loss, sent those enrollees scrambling for new 
coverage, and, again, left doctors, hospitals, and patients 
with medical costs worth hundreds of millions of dollars. That 
is what happened. And so as you give out more taxpayer money, I 
hope you will look at that example of New York. And who did 
that help at the end of the day? It certainly did not help 
those individuals, those families who are now facing this 
prospect of having to pay twice and undergo the dislocation we 
talked about.
    Mr. Slavitt. I would like to try to respond, and in doing 
so, I want to make sure that in the course of saying I want to 
review your numbers, the more important point is not lost that 
if there are individual cases where individuals are in 
difficult situations and are not getting covered, we have a 
unit that is set up that looks at all these kinds of cases, and 
I want to know of any of these specific cases, because that 
will be a very high priority for us. So whether or not your 
numbers and our numbers match, that is less material to me than 
making sure that I communicate that if there are situations 
that you hear of in any of those States.
    New York is an interesting situation, and Mr. Counihan will 
be able to talk about this because he spent days and days and 
days on end, did multiple trips to New York. We conducted 
separate special audits for New York. What is interesting about 
New York is when the original loan was made, as I look back on 
the Deloitte reports that were before my time, New York had 
scored over 90 percent, I think the highest if not one of the 
highest scores, and even when I hired an independent auditing 
firm when I took the job in February, New York was not 
identified as high-risk. And so there was a narrative or a 
belief, again, based upon the fact that claims had not come in 
yet from many independent sources, that New York was doing 
really well.
    We saw some early warning signs, and Kevin and I ordered 
and independent audit and sent auditors up there in, I believe, 
the third quarter, and presented to the States and to the CO-
OPs that they were going to see losses they had not yet 
expected. And I think what happened in New York, if I can get 
into the specific example, is their financial systems were not 
as accurate, and so the reports that they were sending us 
around the profitability of that large book of business was not 
accurate. And it was not until we did this independent audit--
and you can correct me if I have gotten any of this in any way 
incorrect--that we realized that this was a situation that was 
going to come back and hurt them. And we spent a significant 
amount of time in the situation to try to prevent the damage 
that we are talking about right now. But, Kevin, you can add 
anything.
    Mr. Counihan. No, Andy. I think you said it well.
    Senator Portman. OK. Well, if there had been proper 
oversight back in 2014, we would have been able to address this 
issue, because they did overshoot substantially their 
enrollment targets. And, again, underpricing premiums, 
overshooting enrollment targets leads to this multiplying 
effect we talked about, and that is exactly what happened. And 
then we gave them more money, and it created even more 
problems. And that is the reality.
    I want to give Senator Sasse the opportunity to ask a 
question. I will come back for one more round. Senator Sasse.
    Senator Sasse. Thank you.
    I would like to look at the report. I know that you said 
you have not had a chance to read all of it in detail, but I 
want to point to two pages that I think are fairly self-
explanatory.
    The main report that we are talking about today that was 
released, can we go to pages 56 and 57, ``IV. Misconceptions 
Concerning the CO-OP Program.'' When I asked a few minutes ago 
if you really thought that any of these 12 failed CO-OPs were 
conceivably going to ever repay the taxpayer, you said that 
potentially their accounts receivable would become a source of 
some of the funding that might come back to the taxpayer. And I 
asked what that meant, and you said that the reinsurance 
program might be yielding funds for some of these failed CO-
OPs.
    If you would go with me to page 56 and 57, I would like--
again, as the Chairman has said, these are publicly available 
numbers. I would like you to just walk me through what this 
table\1\ means. I think what it means is that the CO-OPs had 
much healthier populations than the overall Obamacare or 
Affordable Care Act marketplace. And if that is true, this 
means that, on net, our CO-OPs paid in $116 million to the 
reinsurance program. They are not getting any money back. I 
mean, here and there you may have one. The Arizona example, 
Meritus Health Partners, I am not familiar with them. It says 
that they are going to receive $2 million of reinsurance 
payments. But, on net, these insurers, including CoOportunity 
in my State, if you look at CoOportunity on page 56, they, on 
net, paid in $6.4 million because they had healthier 
populations than the insurance marketplace as a whole, which I 
think, humbly, contradicts the entire line of answers you gave 
in our last exchange.
---------------------------------------------------------------------------
    \1\ The table referenced by Senator Sasse appears in the Appendix 
on page 136.
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    Mr. Slavitt. Well, that would be bad if it did. I think the 
confusion--and these are complicated programs--is between risk 
adjustment, which you are referring to, and reinsurance.
    Senator Sasse. OK, you are right. I should have used the 
term ``risk adjustment.'' Let us go forward with that.
    Mr. Slavitt. So risk adjustment is one source, one 
potential source of receivable. So is reinsurance, and so is 
risk corridors, because no one really has a good feel for how 
much risk corridors are going to pay in the coming years, so 
those are reserved, separately.
    So all three of those are potential sources of funds, and 
as I mentioned, we have just put a hold on tens of millions of 
dollars of receivables to CO-OPs that they have been expecting 
from those sources. So those funds are available.
    Senator Sasse. OK, tens of millions. We are talking about 
$1.2 billion, though, so let us have our numerator and 
denominator right. I mean, how much are we talking about, $30 
million?
    Mr. Slavitt. Correct--I do not have the exact figure, but I 
can get that to you.
    Senator Sasse. What is that? That is 2 percent of the total 
we are talking about today. Let us say your tens of millions is 
$90 million. We are still at less than 5 percent of the real 
question here, right?
    Mr. Slavitt. From that particular hold, correct.
    Senator Sasse. OK. Are there other sources?
    Mr. Slavitt. That hold does not represent the entirety of 
what the receivables would be. And, look, I know it would be 
helpful if I could give you an estimate, and I understand why 
you would want me to--why it would be helpful to give you an 
estimate. And I hope you understand why I am reluctant to start 
negotiating publicly some figure. And I also think it is 
irresponsible because I will be wrong almost no matter what 
number I say.
    But to your general point, do I expect we are going to 
recover 95 percent or 100 percent of these loans? No, I do not.
    Senator Sasse. But do you really expect we are going to 
recover 10 percent of these loans? You do not----
    Mr. Slavitt. I do not know. I do not know. I really do not.
    Senator Sasse. What is the universe that could ever get us 
to 10 percent?
    Mr. Slavitt. I think I went through the categories. I do 
not know that I could be more specific. But I would be happy--
--
    Senator Sasse. I know, but I do not want the categories. I 
want the taxpayers' money.
    Mr. Slavitt. I would be happy to followup, go through this 
report, which I have not had a chance to go through--I am sure 
there will be things in there that will be helpful to us; we do 
have our own sets of numbers--and sit down and try to see how 
much information we can provide you.
    Senator Sasse. OK. Your distinction between risk adjustment 
and reinsurance and the risk corridors is important. 
Technically, obviously, that is true. But it is still based on 
the underlying premise that maybe the CO-OPs failed because 
they had a much sicker population. And I think what the risk 
insurance numbers on page 56 and 57 show us is that the CO-OP 
enrollees were actually healthier than the average population. 
So the broad ideas that these CO-OPs failed because they sort 
of accidentally attracted a much sicker population, I do not 
think we have any evidence that shows that to be the case.
    Mr. Slavitt. And I do not think I made that claim. If I 
did--certainly that would be a sweeping generalization that I 
would not make. And I also do not know that they had a 
healthier population because of the risk adjustment. I think 
the CO-OPs would tell you, many of the CO-OPs would tell you 
that they had a sicker population, but they were not able to 
get their numbers submitted for risk adjustment appropriately, 
and Kevin can walk through that, if you would like.
    Senator Sasse. Sure, I would love to hear that.
    Mr. Counihan. OK. Well, essentially, Senator, the risk 
adjustment program is highly sensitive to claim coding and 
diagnostic codes. And if they are not done properly or 
thoroughly, that can have a real impact on the financials of 
that CO-OP and other risk adjustment. And we clearly have a 
terrific example with one of those who has subsequently 
corrected that. Again, no heroes or villains. We are all 
learning, but that is very sensitive to that.
    Mr. Slavitt. But in a nutshell, their financial systems 
were behind at the time they made----
    Senator Sasse. Understood. But I am not looking for 
villains. I am thinking we need to acknowledge the just utter 
incompetence of trying to essentially plan a program like this. 
So I am not asserting that anyone here is evilly motivated. But 
whether or not anybody is competent to oversee this program, I 
have not seen any evidence of that yet. So, humbly, I am not 
asserting villain. I am just saying that, the more you look at 
these numbers, the less plausible it is that anybody knew what 
they were doing when they looked at these CO-OPs when one of 
the sort of core answers for why this sub-segment of the larger 
Affordable Care Act population marketplace could have failed 
would have been because the CO-OPs attracted an unusually sick 
population. It does not seem like we have any evidence that 
suggests that, and it would appear, again, just based on the 
snapshot we have from the risk adjustment market, that a net 
pay-in of $116 million is not a net zero and it is not a net 
pay-out. I think your evidence would suggest these are 
healthier than average, which makes it even harder to 
understand how we would not have recognized that we were going 
to have a failure rate of more than 50 percent among the CO-
OPs.
    Thank you, Mr. Chairman.
    Senator Portman. Thank you, Senator Sasse.
    We are in the third round here, Mr. Chairman, and I do not 
want to catch you unaware, but if you are interested in asking 
a question, I would like you to go before me since I know you 
have other hearings to attend.
    Chairman Johnson. Go ahead.
    Senator Portman. All right. Well, let us followup on New 
York, because, Mr. Slavitt, you indicated that you all had 
spent a lot of time looking at that, and particularly you said 
that Mr. Counihan had spent time. You made a statement that 
said that you thought that your team, again, had done the best 
job they could with the information that they had. When HHS 
awarded additional solvency loans to these three failed CO-OPs 
we talked about--Kentucky, New York, and CoOportunity--when 
they were in danger of missing their capital requirements, you 
had to know they were in financial trouble and at risk of being 
shut down by State regulators. And yet you invested hundreds of 
millions of additional dollars in taxpayer dollars.
    In your written testimony, you confirm what you said today. 
You say that in evaluating additional solvency loan 
applications, ``CMS undertook a rigorous review process 
substantially similar to what was conducted for the initial 
round of loans.'' That is your testimony. Let us explore that 
for a minute. Let us take, again, New York as an example, 
because you both talked about that earlier, how you spent a lot 
of time on that.
    Like all CO-OPs, its initial loan application involved 
third-party review of its business plan by Deloitte. We talked 
about the Deloitte review earlier, which included extensive 
discussion of the reasonableness of proposed budgets, finances, 
and business plans.
    Let us turn to the first page, page 1 of the hearing 
exhibit package.\1\ That is this package. On page 1, you see 
the analysis that Deloitte did of the New York CO-OP's 
application for an additional solvency loan. Right at the top, 
the first sentence reads, and I quote, ``Deloitte will not 
provide an opinion regarding the reasonableness of the proposed 
changes to each CO-OP's business plan. Nor will Deloitte 
provide an opinion regarding the likelihood of each CO-OP 
achieving sustainable operations based upon the revised 
business plan.''
---------------------------------------------------------------------------
    \1\ The page referenced by Senator Portman appears in the Appendix 
on page 142.
---------------------------------------------------------------------------
    So this notion that it was substantially similar to what 
was conducted in the initial round of loans is just not 
accurate. Deloitte did not provide the analysis. I am told, by 
the way, by some of your people that they said you guys did not 
give them enough time to do it because you wanted to get the 
money out the door. But Deloitte did not do that analysis.
    In light of that, do you stand by your testimony that this 
review was rigorous and substantially similar to the review 
provided to initial loan applications which did include, again, 
this third-party analysis of whether the CO-OP'S business plans 
were reasonable?
    Mr. Slavitt. I do not, and I know I do not need to keep 
stipulating it was before my time, so--but I will say----
    Senator Portman. And I understand that, but in your 
testimony you are making the statements that are important for 
this hearing because we are talking about, again, this question 
of competence, as we said earlier, but also, accountability and 
what can we learn from this.
    Mr. Slavitt. Sure.
    Senator Portman. If you are saying everything was done 
right, we did the analysis just as we did with the initial 
loans, it is just not accurate.
    Mr. Slavitt. It is a fair question, absolutely. And I think 
the way I interpret Deloitte's statement here is that they are 
not ultimately accountable for these decisions. We are. And 
that is absolutely correct. The purpose behind hiring----
    Senator Portman. Well, wait. They are saying they did not 
provide an opinion. They are--period. Not that here is our 
opinion but you guys are ultimately accountable. They did 
provide opinions on the initial loans. We talked about that. We 
talked about it. You guys set up the standards. And I talked 
about the concerns that they raised in each of those where 
there should have been a red flag. But here they did not even 
do it. That is the point.
    Mr. Slavitt. I think the team, what they were doing, the 
risk committee, was getting multiple sets of eyes, and I think 
what the Deloitte team is saying is, Hey, you cannot count on 
what you are seeing from us to be what they are warranting, at 
least the way I read this, they are warranting that we should 
not count on their analysis in making this judgment. And I 
think that is----
    Senator Portman. They did not do an analysis. That is the 
point. So here is my question to you: Who did do the analysis? 
Who did do the analysis when additional taxpayer dollars were 
given to New York? Who did the analysis? We have asked you all 
this, by the way, for several months now, and we cannot get an 
answer. That is one reason I am asking you, because we do not 
know.
    Mr. Slavitt. I believe they did do the analysis. I believe 
they did not render an opinion.
    Senator Portman. Who is ``they''?
    Mr. Slavitt. Deloitte.
    Senator Portman. No. Let me look at the document. This is 
page 1. Page 1 right here. This is from Deloitte: ``. . . will 
not provide an opinion regarding the reasonableness of the 
proposed changes to each CO-OP's business plan. Nor will 
Deloitte provide an opinion regarding the likelihood of . . . 
sustainable operations based upon the revised business plan.''
    Mr. Slavitt. Are you saying because they did not render an 
opinion they did not do an analysis?
    Senator Portman. Yes. Well, did they?
    Mr. Slavitt. Yes.
    Senator Portman. Why haven't you provided us that analysis?
    Mr. Slavitt. That is what it is. That is what this is. This 
is the analysis. They provided the analysis, and what they said 
is use this analysis, make your decision, but we are not 
providing an opinion.
    Senator Portman. Yes, and you are saying they did not 
provide opinions for the initial loans?
    Mr. Slavitt. No, I am not saying that. I am saying they----
    Senator Portman. Well, that is what your statement says. 
Your statement says you ``undertook a rigorous review process 
substantially similar . . .'' Do you think substantially 
similar means in one case there is an opinion, in another case 
there is not an opinion, and those are substantially similar? 
You did not give them enough time because you wanted to get the 
money out the door. That is what we are told. And so, I mean, 
look----
    Mr. Slavitt. I think I would find the work substantially 
similar enough that I would stand by that statement. Regardless 
of the fact that they said, hey, we are not willing to say that 
this is an opinion, I think the work is substantially similar. 
I understand you do not think that it is.
    Senator Portman. Yes, well, look, you probably had some 
internal experts analyze the question and, therefore, you felt 
like you did not need Deloitte to do it, which is probably what 
your more accurate answer would be. My view is you needed the 
third-party analysis and the third-party opinion.
    Again, let us recap what happened in New York. Health 
Republic of New York applies for an additional solvency loan. 
It was projecting a loss of $62.8 million in 2014, $23 million 
in the next year, so we know the CO-OP's original business plan 
was not working. The original projections were wildly off the 
mark, as we talked about earlier. Its losses were 14 times 
greater. And yet you awarded the CO-OP an additional $90.7 
million without having any third-party opinion as to whether 
its new business plan was reasonable or likely to work. And the 
consequence was that the 
CO-OP lost $77.5 million in 2014, $544 million--more than half 
a billion dollars--in 2015. And, again, we talked about the 
consequences of this, the human toll, which is families, 
individuals not just having to be dislocated, but now facing 
the possibility that these claims that have not been paid--
doctors, hospitals, 
clinics--could come back on them. So they paid once; they paid 
their premiums. They did everything they were told to do. And 
now they have this risk.
    So I guess I would hope that you would say if you had to do 
it over again, you would actually ask for that third-party 
analysis that you--and opinion that you had in the initial 
loans that you say were substantially similar.
    With that, let me turn to the Chairman of the Committee who 
has joined us and thank him for his help with regard to PSI 
generally, but specifically on this investigation. Senator 
Johnson.
    Chairman Johnson. Thank you, Mr. Chairman, and I appreciate 
you calling this hearing. I apologize I could not be here 
earlier. I was at a Senate Foreign Relations business meeting, 
which had some important resolutions we had to be passing. So I 
missed a lot of the detailed testimony and questions and 
answers, and I really do not want to hop into where some other 
people have tread.
    Let me kind of pull back and let us go to the obvious. Mr. 
Slavitt, your background is in the private sector, correct?
    Mr. Slavitt. That is correct, Senator.
    Chairman Johnson. You came from Optima, which is a division 
of United Health?
    Mr. Slavitt. Optum, yes.
    Chairman Johnson. What was the average profit margin of 
United Health after tax?
    Mr. Slavitt. Four, 5, 6 percent perhaps.
    Chairman Johnson. Relatively low. I mean, on average, 
public corporations have pre-tax about 10 percent and after-tax 
about 5 percent, correct?
    Mr. Slavitt. Yes.
    Chairman Johnson. Not a wildly profitable or outrageously 
profitable type of industry, correct.
    Mr. Slavitt. That is correct.
    Chairman Johnson. From your standpoint--again, I know you 
are new to the position--wouldn't you have kind of real 
concerns as a private sector insurer under the old system that 
when the government set up a bunch of these CO-OPs, that they 
were going to subsidize them with these risk corridors and 
these reinsurance plans, weren't you a little concerned that 
maybe these CO-OPs might tend to try and gain market share by 
underpricing their premiums?
    Mr. Slavitt. So, you ask a really good, difficult question.
    Chairman Johnson. So I would like just a basic, obvious 
answer to it. From the private sector, isn't that a real 
legitimate concern? And isn't that exactly what happened?
    Mr. Slavitt. Well, so these companies entered markets that 
had not had new competitors in many cases in decades. So, of 
course, I think you are correct, the companies would not like 
to see someone come in and offer more----
    Chairman Johnson. It is not what the company--I am saying 
what was the natural result of what was going to happen with 
these government-run CO-OPs? Because they were going to come 
in, they were going to try and gain market share, they were 
going to underprice their product based on what their loss 
ratio would be, correct?
    Mr. Slavitt. Well----
    Chairman Johnson. And isn't that exactly what happened? 
Isn't that exactly why the American taxpayers are on the hook 
for about $2.5 billion now in loans?
    Mr. Slavitt. So these were loans to local nonprofit 
companies who I do not think had as a goal--I would not imagine 
they had as a goal to price themselves out of business. I think 
they clearly in many cases----
    Chairman Johnson. That is exactly what happened, though, 
correct?
    Mr. Slavitt. That is correct in many cases, yes.
    Chairman Johnson. In the private sector, did you ever 
believe for a moment President Obama's insurance--that under 
Obamacare the cost of family health care would decline by 
$2,500 per year?
    Did you ever think that was possible coming, again, from 
the insurance industry, where you know that the profit margin 
is about 5 percent? There is about $1 trillion of the $2.8 
trillion that we spent annually in 2012 runs through insurance 
companies. The average after-tax profits of the top seven is 
about 4.4 percent. So, again, that is about $45 to $50 billion 
of profit out of a $2,800 billion a year market. Did you ever 
think for a minute that this government-run health care system 
would actually deliver health care costs $2,500 less per year 
per family?
    Mr. Slavitt. So the way I interpret that $2,500--and maybe 
I am not interpreting it correctly--is that that would be the 
reduction in health care cost trend under the Affordable Care 
Act, which----
    Chairman Johnson. Do you think that is the way the American 
people heard that?
    Mr. Slavitt. I think that is how some people heard it.
    Chairman Johnson. You think that is what the majority of 
Americans heard when they listened to President Obama and 
supporters of the bill promise that if you pass this wonderful 
bill, the average cost for insurance per family is going to 
decline by $2,500? Do you think people thought, well, that will 
just be--otherwise, it would go up higher by $2,500.
    Mr. Slavitt. When I look at the text of that statement, 
yes, that is how I interpret it, and also that 20 million new 
people have health insurance and we have an uninsured rate 
below 10 percent. I think all of those things--I do not think 
anybody could have perfectly predicted the outcome of a new law 
of this size and complexity. And I think there are certainly 
some very good things and certainly some bad things and some 
challenges, and we are talking about one of the biggest 
challenges----
    Chairman Johnson. In your private sector experience, did 
you ever participate in high-risk pools in different States?
    Mr. Slavitt. I am aware of them, sure.
    Chairman Johnson. OK. Another problem Mr. Obama made and 
other supporters of the bill made is that if you like your 
health care plan, you can keep it, period. Again, coming from 
the private sector, understanding how those high-risk pools--by 
the way, we had one in Wisconsin. About 22,000 people were 
getting coverage that they liked, that they could afford. 
Coming from the private sector looking at the Obamacare law, 
you knew in the private sector those high-risk pools would be 
gone, correct? That people that were being insured under the 
high-risk pools would not have access to those health care 
plans, correct? Did you have any doubt that those things would 
survive? In other words, did you believe President Obama's 
repeated assurance and promise that if you like your health 
care plan, you can keep it, period? Did you ever for a minute 
believe that claim?
    Mr. Slavitt. Well, what I believe was that there would be 
guaranteed coverage in the marketplace so that everybody could 
get coverage. Whether or not----
    Chairman Johnson. So, in other words, you did not believe 
President Obama's claim that if you like your health care plan 
you can keep it?
    Mr. Slavitt. I think what happened was there were folks 
that had coverage that was below a standard that the Affordable 
Care Act set, and some of those people did, in fact, lose their 
coverage, as you well know.
    Chairman Johnson. You also understand that insurance 
products change as networks narrow.
    Mr. Slavitt. Sure.
    Chairman Johnson. People might lose--if they lose a health 
care plan, let us face it, they lose a plan they could afford, 
that they liked in a high-risk pool that gave them access to a 
doctor. If they were forced onto a different plan, maybe a 
comparable plan, maybe one with better deductibles, although it 
has not happened, that being forced into another health care 
plan might cause them to lose access to a doctor they trusted, 
correct?
    Mr. Slavitt. The Affordable Care Act created a higher 
standard----
    Chairman Johnson. So President Obama's repeated assurance 
that if you like your doctor, you can keep that doctor, period, 
was incorrect, wasn't it?
    Mr. Slavitt. Here is my perspective----
    Chairman Johnson. No. I just really want an answer to the 
question.
    Mr. Slavitt. I think hospitals and physicians have been 
moving in and out of health care networks for 20 or 30 years, 
and I do not think anything in the Affordable Care Act changed 
that fact. So, yes, I guess is the answer to that.
    Chairman Johnson. I mean, my point is that those promises 
by President Obama were ruled PolitiFact's 2013 Lie of the 
Year. Coming from the private sector, had you made those kind 
of assurances to your policyholders, do you think your company 
would still be in business? Had your business, had you as the 
CEO or as a senior manager of one of those businesses conducted 
that level of massive consumer fraud, what would have happened 
to a private sector business? You would not be around, would 
you? You would be facing an enormous number of lawsuits.
    Mr. Slavitt. I think our interpretations are a little bit 
different, but I understand your point.
    Chairman Johnson. So, again, getting back to the issue at 
hand, part of this hearing, is that CMS has loaned $2.4 or $2.5 
billion to CO-OPs that obviously were not going to be able to 
survive. We continued to pump money into these CO-OPs knowing 
they would never be able to repay them. You have not done the 
due diligence. The review of these things have not been 
rigorous. It was obvious they were never going to be able to 
pay them back. Now the American taxpayers are going to be on 
the hook for about $2.5 billion, and that is assuming you do 
not continue to pump money into these failing enterprises. 
Anybody want to refute that?
    Mr. Slavitt. I guess what I would suggest--and I do not 
know that I will not repeat a lot of the things that we have 
said so far today, but, clearly, starting up a small insurance 
company is one of the biggest challenges imaginable, 
particularly because, as you said, they face significant 
entrenched competitors with years of history, thousands of 
people, and these are small enterprises. And I think it is very 
fair to say that the risk of failure of these CO-OPs is quite 
high.
    What we have tried to do to the best we can--and I think we 
will accept our share of responsibility and criticism 
certainly--is to oversee these programs, to maximize the 
opportunity, to get these CO-OPs through the early 3-to 4-year 
startup stage to a point where they can be stable, and the 
Federal taxpayer can get its money back. In some cases, we have 
not been able to do that, and in some cases, those companies 
have not put forward strategies which have succeeded in those 
markets. And I would certainly acknowledge that, Senator.
    Chairman Johnson. That is great you are accepting the 
responsibility, but the American taxpayer will be on the hook 
for the $2.4, $2.5 billion, and that is unfortunate.
    Thank you, Mr. Chairman.
    Senator Portman. Thank you, and, again, gentlemen, thank 
you for coming today and giving us your perspective. I want to 
just end, if I could, on two points.
    One is there was a discussion earlier about the States' 
role here, and I just wanted to be very clear about one thing, 
and I am happy to hear your response to this. But to shift the 
blame to the States I think is inappropriate. HHS had authority 
and sole authority to be able to stop these disbursements when 
it became clear that the CO-OPs were not likely to be 
financially viable and sustainable, and we have talked a lot 
about that today. It is not the States. The loan guarantee does 
not give that power to the States. It says HHS, and I quote, 
``has sole and absolute discretion'' to terminate a loan 
agreement, and HHS had the power to withhold these 
disbursements when the CO-OPs did not perform under the 
corrective action plans we talked about, which were not put in 
place--for 5 of the 12 failed CO-OPs, they were never put in 
place. Never. For another five, you waited until September 
2015. So I just want to be clear in the record here, and I 
would be happy to hear your comments on this, that shifting the 
blame to the States is not where the appropriate accountability 
ought to be here. It was HHS, despite plenty of warnings, that 
watched these CO-OPs lose, on net, about $1.4 billion, even as 
they failed to take corrective action for more than a year, and 
in some cases, again, not at all.
    Any comments?
    Mr. Slavitt. Sure. You are correct, there is no question 
that we had the discretion to hold back cash to disburse from 
these CO-OPs. And in about a third of the cases, when the team 
had a request for cash, the team did not make that 
disbursement. But I think the challenge--and I think it is the 
challenge that we have, and it is an important question--is 
ultimately if we do not disburse the cash at some point to a 
startup CO-OP, we are most assuredly putting that CO-OP out of 
business and most assuredly putting some of their consumers at 
risk.
    So the team has to make very tough choices. If they fund 
the CO-OP, there is certainly not going to be any guarantee 
that those CO-OPs are going to succeed if they fund the grant 
that has already been made. If they do not fund it, they are 
almost certainly putting them out of compliance and putting 
them out of business. So I do not suggest for a second that the 
team made every decision the right way. I would suggest that it 
is not as if the team was turning a blind eye and that there 
were lots of good choices in this oversight process. As you 
very well know, overseeing a small company in a complex 
environment is challenging, and I will say that in my defense 
of the team, it is not a defense of every decision they made. 
It is certainly not to point fingers at the States. It is to 
say as I have gone back and continually tried to ask the 
questions with the information that they made available, given 
the two choices they had, and I think notwithstanding the fact 
that we could put them on an oversight plan, at the end of the 
day if we do not withhold cash, you cannot force an action. And 
once we withhold cash, people do not get paid, claims do not 
get paid, and the loans never come back to us. And that is the 
difficult challenge that we faced, and recognizing that your 
report suggests that you think we could have done a better job.
    Senator Portman. Well, again, there were plenty of tools, 
including the corrective action plans we have talked about and 
the enhanced oversight plans, short of even terminating. But 
the reality is there are 700,000 consumers who now find 
themselves not just, again, dislocated, but some of them 
actually facing the possibility of paying twice, once for their 
premium and now for claims that were never paid to health care 
providers. And that is a tragedy.
    We thank you for your testimony today and appreciate it. We 
will go on to the second panel. Thank you.
    [Pause.]
    Dr. Harrington, thank you for being here. We are going to 
move ahead quickly here because we have a vote coming up, and 
we have lots of questions for you, and I know you have a 
presentation for us.
    Dr. Scott Harrington is the Alan B. Miller Professor of 
Health Care Management, Insurance, and Risk Management, and 
Business Economics and Public Policy at the University of 
Pennsylvania Wharton School. He is also the Chair of the Health 
Care Management Department. He is a Senior Fellow with the 
Leonard Davis Institute for Health Economics and an adjunct 
scholar at the American Enterprise Institute and was president 
of the American Risk and Insurance Association and Risk Theory 
Society. His recent policy research focuses on the Affordable 
Care Act's impact on insurance markets and insurance financial 
regulatory issues. He is a true expert, and we appreciate his 
input to our report and his being here today.
    We look forward to your testimony. It is the custom of the 
Subcommittee to swear in our witnesses, Dr. Harrington, so if 
you would not mind, please stand and raise your right hand. Do 
you swear the testimony you are about to give before this 
Committee will be the truth, the whole truth, and nothing but 
the truth, so help you, God?
    Mr. Harrington. I do.
    Senator Portman. Excellent. Let the record reflect the 
witness answered in the affirmative. Your written testimony 
will be printed entirely in the record, as we have talked 
about, and we would ask you to try to limit your oral 
testimony. I think we initially asked you to do it in 10 
minutes. If you would do it even a little shorter, that would 
be great just because I know we are going to have some 
questions for you. But, again, thank you for your input today, 
and we look forward to your testimony.

  TESTIMONY OF SCOTT E. HARRINGTON, PH.D.,\1\ ALAN B. MILLER 
 PROFESSOR, AND CHAIR, HEALTH CARE MANAGEMENT DEPARTMENT, THE 
           WHARTON SCHOOL, UNIVERSITY OF PENNSYLVANIA

    Mr. Harrington. Thank you, Chairman Portman and Chairman 
Johnson. I publish widely on insurance pricing and price 
regulation, capital and insolvency risk, the causes of 
insolvencies, solvency prediction and regulation, risk-based 
capital requirements, and State guaranty funds. I have done 
some prior work on 
CO-OPs' financial conditions. I have not read the Majority 
Report. I have not seen anything about corrective action plans. 
I did review a lot of documents for preparing my testimony, 
especially for Iowa, Nebraska, New York, South Carolina, and 
Tennessee, including business plans, feasibility studies, pro 
forma financials, pricing analysis, additional funding 
requests, Deloitte reviews, and some financial information 
provided to the Subcommittee staff.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Harrington appears in the 
Appendix on page 60.
---------------------------------------------------------------------------
    As we know, the CO-OP Program ultimately awarded $2.44 
billion of low-or zero-interest Federal loans to 23 CO-OPs; 
$358 million was for startup loans, $2.09 billion was for 
solvency loans to meet State regulatory capital requirements.
    Twelve of the CO-OPs have closed. The longevity of the 11 
CO-OPs still providing coverage in 2016 is uncertain. Future 
closures seem likely. Eight of the 11 are reported to be 
subject to some CMS corrective action plan.
    The closed CO-OPs' ultimate deficits are going to depend on 
the resolution of a lot of claims, and the final tally of what 
their claim costs are, as I will elaborate a little bit, very 
little, if any, of the $1.24 billion in Federal loans will be 
repaid from those closed 
CO-OPs. At least several will be unable to meet their 
obligations to enrollees and health care providers, and some 
will require significant State guaranty fund assessments.
    The CO-OPs did face significant operational challenges, and 
the ACA 2014 reforms posed major challenges and risks 
associated with pricing and utilization of the previously 
uninsured and transition of previously insured people to ACA-
compliant plans. The 
CO-OPs were inherently vulnerable to unpredictably high claim 
costs, including from any adverse selection from established 
carriers renewing their pre-2014 plans, especially if enrollee 
growth outpaced projections. They had little ability to 
diversify pricing and claims risks across geographies and 
products. CO-OPs had none of their own experience and data to 
consider in pricing. They were plausibly prone to a winner's 
curse, pricing too low, generating large enrollment and losing 
lots of money. Pricing uncertainty remained high for 2015 
premium rates, which had to be filed in the summer of 2014 when 
the CO-OPs still had relatively little data to assess claim 
experience in the adequacy of premiums.
    Insurers must hold substantial capital to achieve a high 
solvency probability. Academic literature stresses that 
insurers and other financial firms' solvency incentives depend 
on the amount of owner's capital at risk, on the firm's value 
as a going concern, which could be lost in financial distress, 
on the sensitivity of customers' demand to insolvency risk, and 
on external monitoring by lenders and other counterparties.
    CO-OPs' financial strength, growth, and potential for 
underpricing should have been a central focus from the 
program's inception. CO-OPs faced considerable pressure to 
capture market share. They had almost no private capital, no 
going-concern value, no financial ratings, and it was likely 
that many potential customers would be insensitive to 
insolvency risk.
    Very importantly, history indicates that insolvent insurers 
often have charged low prices and grown rapidly with inadequate 
reported claim liabilities, ultimately producing claim costs 
much larger than reported. There is also risk that insurers 
will try to grow their way out of financial trouble, hoping, or 
gambling, for survival. This history and context also suggest 
that CO-OPs' financial strength and potential adverse 
consequences of rapid growth should have been paramount, 
especially given slow development of information on claims.
    The approved CO-OPs' award applications included detailed 
business plans, feasibility studies, including actuarial 
projections of growth, profitability, and ability to repay 
government loans. Originally, their startup loans were recorded 
as debt on their financial statements. But to meet State 
regulatory requirements, all solvency loans were treated as 
``surplus notes,'' subordinate to all claims and counted as 
capital for the purpose of meeting regulatory requirements.
    Actuarial analyses supporting solvency loan awards and 
disbursements relied on pricing, claim cost, and enrollment 
assumptions over a long horizon. The analyses I reviewed 
contained what I would consider modest stress tests. They did 
not combine or consider much higher than projected enrollment, 
combined with worse than expected claim costs. The baseline 
pricing assumptions, however, did build in something for a 
potentially sicker population.
    Now, as we have heard this morning, some CO-OPs experienced 
vastly larger enrollment than projected, greatly increasing 
their need for capital. This should have been a cause for 
alarm. Those CO-OPs generally had low premium rates compared 
with competitors. Other CO-OPs generally with relatively high 
premiums had very low enrollment in 2014. Some CO-OPs continued 
rapid growth in 2015, further increasing their need for 
capital. Some with low enrollment reduced premium rates and 
grew rapidly in 2015.
    Six CO-OPs were approved for $355.5 million in additional 
solvency loans in the last 4 months of 2014. Three later 
closed. The regulatory takeover of CoOportunity Health in late 
December occurred just 6 weeks after disbursement of its 
additional $32.7 million solvency loan award approved in 
September, and following the denial of a late October request 
for another $55 million.
    Health Republic of New York sought an additional $70.5 
million in late October 2014, which was denied following CMS 
approval of an additional $90.7 million in September.
    The additional solvency loans exhausted the CO-OP Program's 
$2.44 billion in funding. CMS did not have the funds to approve 
additional requests from CoOportunity Health, Health Republic, 
or any other CO-OPs. With State regulators' approval, however, 
CMS permitted seven CO-OPs to convert startup loans to surplus 
notes so that they could be counted as capital for meeting 
target capital requirements. Five CO-OPs converted a total of 
$82.1 million in startup loans to surplus notes before their 
closure. CMS also accelerated disbursements of solvency loan 
funding to many CO-OPs during 2014 and 2015.
    A couple quick comments on growth, and we have heard this 
this morning. By September 2014, CoOportunity Health had over 
eight times the originally projected number of enrollees for 
2014 and 14,000 more enrollees than projected for 2020. It 
generally had the lowest rates in Nebraska and the lowest rates 
in the Iowa small group market and the lowest rates in at least 
one rating region in the Iowa individual market.
    Regarding New York, Health Republic of New York, its June 
2015 enrollment was over four times the baseline 2015 
projection, over three times the projected high enrollment 
scenario for 2015, and more than double the baseline projection 
for 2020. Health Republic generally had the lowest premiums in 
the regions it operated. It received rate increases for 2015, 
but its rates still generally remained low compared with 
competitors.
    I have done some analysis to back out the ACA risk 
stabilization programs just on Health Republic of New York's 
June 2015 financials. If they had received their entire risk 
corridor requested at that time, they still would have lost $50 
a month for their entire 18 months of operation on a per member 
basis. Without risk corridor receivables, they were losing 
about $150 per month.
    Updated financials provided to the Subcommittee for 10 
other closed CO-OPs suggest little, if any, of their Federal 
loans will be repaid. Assets were less than claim and other 
obligations for 7 of the 10 and only marginally greater than 
those obligations in the other three States. Colorado and South 
Carolina project substantial guaranty fund assessments.
    The CO-OP Program's experience raises a number of key 
questions--beyond the fundamental issue of whether the program 
made economic sense when enacted, which, while difficult to do, 
should be evaluated without the benefit of 20/20 hindsight. I 
will quickly conclude with these.
    First, was it appropriate and prudent to push for the CO-
OPs to begin operations in 2014 as opposed to wait a year or 
two before selling tens of thousands of policies in an 
uncertain environment?
    Second, why were the low premium rates charged by some 
CO-OPs not viewed as a signal of potential trouble from the 
get-go, especially when their plans and rate filings 
anticipated relatively high provider reimbursement and 
administrative expenses?
    Third, why were some CO-OPs permitted to enroll far more 
customers than their projections as opposed to having some 
formal or informal speed limits imposed by CMS and/or State 
regulators?
    And, fourth, why didn't CMS delay solvency loan 
disbursements or possibly terminate loan agreements when 
confronted with enrollments far greater than projected and 
early evidence of operating losses?
    My time is up, so I am happy to take questions.
    Senator Portman. Thank you, Dr. Harrington. You were right 
on time for what we asked you to do, and you have asked key 
questions, many of which, as you know, have been discussed 
today with HHS.
    I would like to go to my colleagues first for their 
questions in that they have come back to the hearing. I know 
they are busy. We have a vote at 11:30, so we will try to keep 
the questions and answers as short as possible. Senator 
Johnson.
    Chairman Johnson. Thank you, Mr. Chairman.
    Dr. Harrington, I want to kind of just go to basic 
economics on this. Let us talk about premiums that real people 
would be paying. We have Janice Fenniman in Spooner, Wisconsin, 
who, before the health care law was implemented, was paying 
about $276 per month. This year she is paying $787 per month. I 
held a telephone town hall yesterday, and I do not have 
permission to use the gentleman's name, but he was claiming 
that, prior to Obamacare, he was pay $400 a month; now he is 
paying $1,000 per month. And, by the way, these are for lesser 
policies. Their deductibles are higher. Their premiums are 
higher.
    Because of the CO-OPs--and, again, as I said in my earlier 
questioning, to me, a private sector guy, it was obvious what 
was going to happen here. I mean, you used the words 
``inherently vulnerable.'' It was obvious what was going to 
happen.
    The experience people have already had of skyrocketing 
premiums, these have been actually constrained because of these 

CO-OPs, correct, in the marketplace? They are underpricing 
their premiums, which puts pressure on the other health 
insurers. So, if anything, premiums have not skyrocketed to the 
point they are going to. Would you agree with that?
    Mr. Harrington. I would agree that at least in 2014 and 
2015, the CO-OPs had a restraining influence on premiums. I am 
not as sure about 2016 because I have not reviewed the filings.
    Chairman Johnson. Well, kind of the game is up right now, 
but going forward, we know how these losses are going to be 
recovered. Certainly, the American taxpayer lose the loans, but 
also the payments to providers, these losses are going to be 
spread over other insurers in States, and then their reaction 
is going to be what?
    Mr. Harrington. Well, I think the big issue is that it is 
becoming more apparent that the cost of the new risk pools 
under the Affordable Care Act is higher than anticipated, and 
that that will produce higher premiums, and that the rating 
restrictions in the Affordable Care Act are going to lead to 
especially high premiums for certain cohorts.
    Chairman Johnson. Describe that in greater detail. What do 
you mean certain cohorts?
    Mr. Harrington. I think one thing that has happened is that 
prior to the Affordable Care Act rating restrictions, people 
in, say, their 50s and 60s that were in relatively good health 
were able to get premiums on a risk-rated basis, guaranteed 
renewable coverage so that their rates would not go up with 
deterioration in their health status. Under the new regime, if 
you are not eligible for any kind of subsidy, you now have to 
buy insurance in a risk pool that limits the amount that can be 
paid based on your age, but, nonetheless, is based on a risk 
pool that includes lots of unhealthy people.
    So I think more and more evidence will show that healthy 
people that try to buy coverage outside of an employment-based 
market going forward, if they are in their 50s and early 60s, 
probably are going to face quite a bit higher premiums than 
what they would have prior to the Affordable Care Act. So that 
is one of the cohorts.
    The other cohort would be very young people that are facing 
higher premiums because of the rating restrictions.
    Chairman Johnson. We have already seen that the first year 
in Wisconsin. A 27-year-old male I think on average experienced 
like a 127-percent rate increase; a 27-year-old female, a 
little under 100 percent, still, dramatic increases.
    Let us talk a little bit about adverse selection and the 
gaming of the system. We have heard anecdotal reports of this, 
of people--one of the reasons you need a high level of 
participation in dental insurance, for example, is otherwise 
people will just delay getting dental care until they have one 
month's worth of premiums and go in there and get all their 
care and then they stop coverage. Isn't that also what is going 
to happen with Obamacare? To a certain extent. I mean, you 
cannot totally predict, but you can certainly time certain 
medical procedures and people will game the system, correct?
    Mr. Harrington. Yes, to a certain extent, and the evidence 
is that it is occurring not only in open enrollment but in 
special enrollment periods.
    Chairman Johnson. Our Committee staff did a pretty good job 
looking at the fact--President Obama said, Trust me, no illegal 
immigrants are going to be qualifying for Obamacare. But the 
way they set up the system is CMS is forced to enroll 
individuals without documentation of eligibility. And so what 
has been happening is people sign up, they get the subsidies, 
they get the prepaid premium tax credits. They also get some 
tax credits or subsidized deductibles and that type of thing as 
well. Our Committee report showed that about $750 million of 
prepaid premium tax credits were paid on behalf of individuals 
who in the end were unable to prove their eligibility. Just 
speak a little bit to that in terms of, again, that was just 
totally predictable, correct?
    Mr. Harrington. I have not studied the particular issue. I 
am familiar with the reports. I think anytime you impose a 
gigantic program with mind-numbing complexity, there are going 
to be many slippages and unintended consequences.
    Chairman Johnson. Let me finish up, because I know one of 
the big reasons people passed Obamacare is they just hated the 
idea of anybody making a profit off of health care. So I just 
kind of want to go through the actual figures. This was in 
2012. America in total spent about $2,800 billion, about $2.8 
trillion worth, $2,800 billion. I have just taken a look at the 
profitability of the top seven companies in health care for 
2012, and the after-tax profits are about 4.4 percent. Of the 
$2.8 trillion, about $1 trillion of that is paid through third-
party payers, basically insurance companies. So if you take 4.4 
percent of $1 trillion, that is about $45 billion of profit out 
of an industry, a sector of the economy that is $2,800 billion 
large. Does that seem like a grotesque level of profit to 
allocate pricing efficiently and do all the things that a free 
market system actually does? Is that out of whack?
    Mr. Harrington. No.
    Chairman Johnson. And what is the result of having 
government come in there and try and stamp out literally 1.6 
percent--that is what that profit represents, 1.6 percent of 
total health care spending was profit of insurance companies. 
And in order to wipe that out, which is really the goal of 
Obamacare, take a look at the dislocations. We have again, 
Janice Fenniman paying $276 before Obamacare, now paying $787 
for a lesser policy. In the end, do you think this is a pretty 
foolish law, a pretty damaging law to real people?
    Mr. Harrington. I opposed the law when it was enacted. I 
think there were better ways of promoting the growth of insured 
people in the United States than passing this particular law.
    Chairman Johnson. I would agree with that assessment.
    Thank you, Mr. Chairman.
    Senator Portman. Thank you, Chairman Johnson. Senator 
Lankford.
    Senator Lankford. Thank you, Mr. Chairman.
    I appreciate you being here and bringing some other facts 
to bear in this. Like others on this panel, I would tell you 
that person after person that I talk to in my State, in 
Oklahoma, talk to me about the same issue. They are spending 
more on health care than they ever have. Their deductibles are 
high. All their premiums are going higher. They have fewer 
options than they had before. The hospitals that I talk to now 
have more benevolent care than they have had in the past 
because though they have ``insurance'' when they walk through 
the door, they cannot afford to use it. We have failed State 
exchanges around the country from States that tried to start 
their own exchange that have gone through the process, and that 
is millions of dollars that has been lost in that process.
    And then when we walk into the CO-OP issue, and it is one 
more piece of this process where in the original design there 
would be these nonprofit institutions that would stand up to go 
compete. In theory, they would be nonprofit insurance 
institutions that were created to compete in areas where there 
was not good insurance available or was not enough available.
    So my initial question to you is: Did you find the CO-OPs 
and their distribution around the country to be in places where 
insurance was not available?
    Mr. Harrington. That is an excellent question, and I have 
not studied that.
    Senator Lankford. What I have seen is that they were not 
competing in areas where they were not available. They were 
trying to startup in places where there was a good market 
already. And if there is a good market already, there were 
other companies that are already available in that area.
    We put out loans that they expected to have a 40-percent 
loss rate, which, by the way, the Consumer Financial Protection 
Board (CFPB) is aggressively going after payday lenders who 
have a 40-percent loss rate on it, a 40-percent interest rate 
that they are putting down, and for whatever reason, they 
thought that was a good idea at the beginning to do this with 
the CO-OPs, which is baffling to me. But then they seemed to 
also have this unique challenge in places that they were in 
that I am trying to determine what happened here. When the CO-
OPs came in and gave arbitrarily low amounts that were not 
business possible--and that has been proven now by more than 
half of them already failing and the rest of them struggling. 
They put out a pricing strategy. Other companies in the area, 
other insurance companies in the area, had to try to compete 
with those CO-OPs that had these arbitrarily low costs on it 
that were clearly not sustainable, which forced them down, 
which I believe some of those insurance companies have now left 
those markets. We have many States that have fewer insurance 
options now, not only the CO-OP leaving but other companies 
leaving as well.
    Do we know a connection here, or is it too early to know 
whether the CO-OPs in those markets were driving prices low, 
forcing other companies to have to try to compete with them, 
and then now they have since left the market as well, giving 
even fewer options to the consumer?
    Mr. Harrington. That is an issue that really needs to be 
subject to high-quality investigation and research. Clearly, in 
principle, low prices can have a negative effect on the market 
overall when they are written really well below what the 
consensus estimate of costs is. And I think we will find out 
more over time as people start to dig into this.
    I would add that, of course, there was a lot of variation 
in 2014 among the 23 CO-OPs. Some had relatively high prices. 
They sold very little business. So in those cases, any negative 
spillovers from pricing were not there. But in a few cases 
where we had this enormous explosive growth during 2014, I 
think it is at least plausible that there were adverse effects 
in terms of pricing in the overall market that could have 
contributed to poor results in the overall market. But one 
thing we know for sure is that when you have a new entrant with 
no experience that comes in with a very low price, someone 
should be paying very close attention to their early enrollment 
and getting whatever data they can about early claims and 
really asking the hard question of: When is enough enough? 
Should we not be putting some sort of speed limit or brake on 
this enrollment so that they cannot run up an enormous tab that 
they will not be able to pay?
    Senator Lankford. So if the CO-OPs were competing on the 
open market and they were trying to get private lending, 
private capital either from a bank or outside equity groups, 
would they have been able to get these loans in your suspicion 
based on their model? CMS has testified that only 16 percent of 
the applicants actually got the loan, which gives the 
impression, we were very limiting, 84 percent we returned away, 
so we really were getting the cream of the crop. Obviously, the 
cream of the crop, more than half of them are now out of 
business.
    So my question is: Of the business models that were 
presented, could they have gotten private funding? Or are these 
individuals presenting a business model that only government 
would have actually provided a loan for them?
    Mr. Harrington. That is an important question. The business 
models that I reviewed, I think it would have been really 
difficult to make a sell to any private investors with those 
models. What private investors would be looking for is: Do you 
have something here that we really think is disruptive and 
beneficial that will allow you to have a better model going 
forward? And I think it is highly unlikely they would have seen 
that.
    Now, I hasten to add that some significant private money 
has gone into health insurance startups, and some of them have 
reported pretty large losses for 2014 and 2015. So private 
investment does not have a monopoly here on any kind of wisdom.
    Senator Lankford. Right, but private investment is also 
tracking the day-to-day operations, trying to figure out are 
you going to make it, are you not going to make it. Are we 
going to keep dumping money into this? Or are we going to force 
you to make some changes internally to actually be successful?
    Mr. Harrington. Yes, and private investment in these sort 
of situations, the money will be paid out over time based on 
clear evidence that the performance is being met, and if there 
are warning signs that things are problematic, the spigot gets 
shut off.
    Senator Lankford. Rather than changing the rules and 
saying, OK, you can now use this money and count it as capital 
and count it as assets, and the rules change through the middle 
of it, they are not going to do that in a private setting.
    Mr. Harrington. No.
    Senator Lankford. Let me ask another question that is a 
quick one as well. The CLASS Act was a long-term-care insurance 
program that was created by Obamacare. At the very beginning it 
was studied to be implemented, it was in the law, do it. 
Secretary Sebelius came out and said this is totally 
unsustainable at the very beginning and said if we try to 
implement this, it cannot be done under this current model. 
Congress agreed, in 2013 to pull out the funding for that 
program--that program went away.
    They saw immediately that the long-term-care insurance that 
was put into place is not sustainable, studied it, and pulled 
it. The CO-OPs, they aggressively went after, started it, and 
put $2 billion into something that we are now discovering is 
just as totally unsustainable. What is different about the 
CLASS Act and their research behind the scenes or the CO-OPs?
    Mr. Harrington. That is a very difficult question. I think 
one thing that is different, as I recall with the CLASS Act, 
you had various independent government agencies doing the 
actuarial projections and forecasts with an eye toward budget 
implications from the beginning, and recognizing that the 
program had to be financially sustainable in order to go 
forward.
    In the CO-OPs' case, there may have been much more 
uncertainty in the short run about what was likely to happen, 
and the CO-OP business plans were accompanied by actuarial 
feasibility studies by major actuarial firms and advisers that 
were putting out scenarios that suggested that they might be 
viable.
    Senator Lankford. Thank you. I yield back.
    Senator Portman. Thank you, Senator Lankford. And, again, 
Dr. Harrington, thanks for your help on this, and your 
expertise has been helpful to us as we have gone through this 
report and tried to figure out how this could have happened. I 
think you have raised a lot of great questions about whether 
this should have happened or not.
    One question you asked in your testimony that I would like 
you to answer is: Should they have launched these at a time 
when there was so much regulatory uncertainty? Or should they 
have waited for a year or two?
    Mr. Harrington. There was this real concern that if you 
missed 2014, you were going to miss the boat, and I am very 
reluctant to be influenced by hindsight here, but my opinion is 
that it would have made more sense to wait at least a year, if 
not longer.
    Senator Portman. Yes. I mean, look, it was a lousy time to 
start a health startup in any category, and certainly in the 
insurance sector. You talked about enrollment being a key 
determinant of a health insurer's financial performance, and if 
you would not mind just talking about that for a second, you 
said there should have been, I think you said in your 
testimony, some speed limits at least in place, incredibly 
sharp deviation from what they projected, both under and over. 
We talked earlier about this with regard to the overenrollment. 
The overenrollment multiplied the problem, where you already 
had a problem, then to have this massive overenrollment 
compared to projections. And yet there were no red flags 
apparently, or at least there was no reaction by the Federal 
Government in pulling back the taxpayer support. Can you talk 
about why that is so important?
    Mr. Harrington. Well, it is very important given the 
history of insurance insolvencies and the pricing problem. You 
can sell a lot of insurance at low prices because the claims do 
not come home until a bit later. So you always really have to 
be on your toes in order to guard against this sort of 
underpricing and rapid growth. Given that context, it made 
sense to really be on top of enrollment.
    I was puzzled, as things rolled out, I was very puzzled by 
the lack of public discussion, the lack of commentary about 
insolvency risk whatsoever in this market. It is as if no one 
understood that insurance companies do fail, and those that 
fail often have been underpriced and grown rapidly. That 
background, that context, as well as the lack of incentives for 
safety and soundness given this type of government funding, 
should have overall made the environment be one of much greater 
caution about how these things would be permitted to grow.
    Senator Portman. And, again, just to be clear, as compared 
to some of the testimony we heard earlier, there was 
information. We had monthly and quarterly reports, including on 
enrollment, an issue that you talked about.
    Let me just ask you this, and it is kind of, speculation in 
your part, but why did this happen? I mean, it was so obvious 
that the underpricing and the overenrollment and the other 
business factors were problematic and there were reports, and 
there was plenty of data. Why did they keep putting money out 
the door and not take the obvious step, which is to cut the 
losses to the taxpayer and cut the losses to all these families 
who ended up losing health care insurance, some of whom now are 
facing the risk of actually having providers have claims 
against them? Even though they paid their premiums, did 
everything right, the providers were not paid because these 
companies went insolvent. And now these consumers are told they 
might have to pay for what the companies did not pay when they 
were required to do so. How did this happen?
    Mr. Harrington. I think in part what happens is even though 
you are getting information, the accuracy of the information 
about claim costs was not there, so there could be a much 
bigger bill than what had been anticipated.
    I have to speculate, but it seems there was a very strong 
commitment to the CO-OP Program, a very strong belief that this 
new model would work in an environment where insurance 
companies were viewed as making excessive profits with 
excessive administrative costs in markets that were regarded as 
not being sufficiently competitive. It seems to me there was an 
ideological commitment to the program and to the success of the 
program.
    Having said that, I will also point out that once you get 
information that a company might be in trouble, there always 
has been a fine line that regulators have to draw about doing 
something that definitely will put the company over the edge or 
giving it a little more runway to try to work things out. But 
in those scenarios, when you give a little more runway to let 
companies try to work things out, you want to make sure that 
they grow, if at all, at a very orderly pace. You want to make 
sure that you have the speed limits. The last thing you want to 
do is to provide more funding to enable greater growth, 
especially when you have maybe soft information about claims 
experience at that point in time.
    Senator Portman. Well, look, given your academic background 
here and lots of experience, I respect what you are saying, and 
I think you are right, there was an ideological commitment, 
your quote, and I think it blinded some of these folks who 
otherwise would have seen these warning signs. And as you say, 
it was a commitment maybe to CO-OPs or maybe against the 
insurance companies that, as you said, were making excessive 
profits. I think it also was to get enrollment numbers up under 
Obamacare, which was part of the desire by the White House at 
the time, and continues to be.
    So I do believe that we have to learn from this. We have to 
come up with ways to ensure that we are not going to lose even 
more, hemorrhage even more taxpayer dollars. At a minimum $1.2 
billion now appears to be lost. We talked earlier about that, 
and we could not get HHS to acknowledge that. But when you look 
at it, the companies who would have to repay that actually have 
assets that are far lower than their liabilities, even taking 
out the loans, forgetting the money that they owe the Federal 
taxpayer. And not a single one has paid a penny in principal or 
interest.
    So I appreciate your focus on this. I hope you will 
continue to work with us on trying to figure out moving forward 
how we avoid this problem even growing further and how we deal 
with this very real problem we have now in some States where 
you have consumers who actually might get tagged with 
additional costs so they lose their health care, they have this 
dislocation, hopefully they have now found health care, but 
they are now looking at the possibility that these claims might 
come back on them.
    Do you have any final comments before we go to our vote, on 
that or other topics? And, again, I want to thank you very much 
for your willingness to come before us, Dr. Harrington. Any 
final thoughts?
    Mr. Harrington. No. Thank you for allowing me to testify.
    Senator Portman. Thank you. Thanks for your good work in 
this area. It has been very helpful to have you.
    Do you have any additional questions?
    Chairman Johnson. Just to thank you for holding this 
hearing. What this underscores is literally what a spectacular 
failure this ideological effort was. You had States that know 
how to do these things, know how to regulate, know how to 
prevent insurers getting into too much trouble. If they start 
getting in trouble, they know how to resolve those things. And 
you have the arrogance of a Federal Government walking in here 
spending at least $1.5, probably $2.5 billion in support of 
these things.
    So this is an incredibly important hearing. We are just not 
getting the press attention to what a spectacular failure 
Obamacare is, how couples lost health care plans and high-risk 
pools that they could afford. The premiums have skyrocketed. 
Out-of-pocket maximums have skyrocketed.
    So I hope this hearing gets a lot of attention, and I hope 
your testimony gets a lot of attention. I hope we actually 
learn lessons. I am not convinced we will. But thank you, Mr. 
Chairman. Excellent hearing.
    Senator Portman. Thank you for your attendance today. And, 
again, to all our witnesses, thanks, particularly here at the 
end. Dr. Harrington, thanks for your expertise.
    I want to thank also my colleague Senator McCaskill for her 
hard work on this Subcommittee, her support of the 
Subcommittee. We missed having her here today and look forward 
to her return soon and her good health.
    I will say that, we have talked a lot today about how this 
money was lent to these dozen CO-OPs that failed. Others, as 
you have said, Dr. Harrington, are in big trouble. And at a 
minimum, we are talking about $1.2 billion of taxpayer money 
that is going to be lost. It will be more than that at the end. 
We all know that. While this happened, there was not corrective 
action taken--in some cases not all, in other cases it took 
more than a year. And what we are looking for today is someone 
to take accountability for it. We heard a little of that, and I 
appreciate that. But this was not the fault of these consumers. 
This was not the fault of the States. This was the fault of 
HHS, the way the program was structured, and then even once it 
was structured, the lack of adherence to the basic requirements 
in these loan agreements.
    So I would hope that we will learn from this and that we 
can avoid further disruption in this case to over 700,000 
consumers, in addition, again, to them having the possibility 
of actually having to pay out-of-pocket more than their 
premiums because there are claims that, from our analysis, 
could be brought against the consumers, which would be adding 
an additional insult to the taxpayers who have already been out 
so much money.
    So this hearing record will remain open for 15 days for 
additional comments or questions by any of the Subcommittee 
Members, and with that, we are adjourned.
    [Whereupon, at 11:36 a.m., the Subcommittee was adjourned.]

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